[Federal Register Volume 76, Number 210 (Monday, October 31, 2011)]
[Rules and Regulations]
[Pages 67260-67285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-27622]



[[Page 67259]]

Vol. 76

Monday,

No. 210

October 31, 2011

Part II





Department of Energy





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Federal Energy Regulatory Commission





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18 CFR Part 35





Frequency Regulation Compensation in the Organized Wholesale Power 
Markets; Final Rule

  Federal Register / Vol. 76 , No. 210 / Monday, October 31, 2011 / 
Rules and Regulations  

[[Page 67260]]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket Nos. RM11-7-000 and AD10-11-000; Order No. 755]


Frequency Regulation Compensation in the Organized Wholesale 
Power Markets

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: Pursuant to section 206 of the Federal Power Act, the 
Commission is revising its regulations to remedy undue discrimination 
in the procurement of frequency regulation in the organized wholesale 
electric markets and ensure that providers of frequency regulation 
receive just and reasonable and not unduly discriminatory or 
preferential rates. Frequency regulation service is one of the tools 
regional transmission organizations (RTOs) and independent system 
operators (ISOs) use to balance supply and demand on the transmission 
system, maintaining reliable operations. In doing so, RTOs and ISOs 
deploy a variety of resources to meet frequency regulation needs; these 
resources differ in both their ramping ability, which is their ability 
to increase or decrease their provision of frequency regulation 
service, and the accuracy with which they can respond to the system 
operator's dispatch signal.
    The Commission finds that current frequency regulation compensation 
practices of RTOs and ISOs result in rates that are unjust, 
unreasonable, and unduly discriminatory or preferential. Specifically, 
current compensation methods for regulation service in RTO and ISO 
markets fail to acknowledge the inherently greater amount of frequency 
regulation service being provided by faster-ramping resources. In 
addition, certain practices of some RTOs and ISOs result in 
economically inefficient economic dispatch of frequency regulation 
resources.
    By remedying these issues, the Commission is removing unduly 
discriminatory and preferential practices from RTO and ISO tariffs and 
requiring the setting of just and reasonable rates. Specifically, this 
Final Rule requires RTOs and ISOs to compensate frequency regulation 
resources based on the actual service provided, including a capacity 
payment that includes the marginal unit's opportunity costs and a 
payment for performance that reflects the quantity of frequency 
regulation service provided by a resource when the resource is 
accurately following the dispatch signal.

DATES: Effective Date: This Final Rule will become effective December 
30, 2011.

FOR FURTHER INFORMATION CONTACT: Robert Hellrich-Dawson (Technical 
Information), Office of Energy Policy & Innovation, 888 First Street 
NE., Washington, DC 20426, (202) 502-6360, [email protected]. Eric Winterbauer (Legal Information), Office of the 
General Counsel, 888 First Street NE., Washington, DC 20426, (202) 502-
8329, [email protected].

SUPPLEMENTARY INFORMATION: 

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

    Before Commissioners: Jon Wellinghoff, Chairman; Marc Spitzer, 
Philip D. Moeller, John R. Norris, and Cheryl A. LaFleur.
    Frequency Regulation Compensation in the Organized Wholesale Power 
Markets Docket Nos. RM11-7-000; AD10-11-000

ORDER NO. 755

FINAL RULE

(Issued October 20, 2011)
    1. Pursuant to section 206 of the Federal Power Act (FPA),\1\ the 
Commission is revising its regulations to remedy undue discrimination 
in the procurement of frequency regulation in the organized wholesale 
electric markets and ensure that providers of frequency regulation 
receive just and reasonable and not unduly discriminatory or 
preferential rates. Frequency regulation service is one of the tools 
regional transmission organizations (RTOs) and independent system 
operators (ISOs) use to balance supply and demand on the transmission 
system, maintaining reliable operations. In doing so, RTOs and ISOs \2\ 
deploy a variety of resources to meet frequency regulation needs; these 
resources differ in both their ramping \3\ ability, which is their 
ability to increase or decrease their provision of frequency regulation 
service, and the accuracy with which they can respond to the system 
operator's dispatch signal. In this instance, the ability to provide 
more accurate frequency regulation service means to follow the system 
operator's dispatch signal more closely.
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    \1\ 16 U.S.C. 824e. Accord 16 U.S.C. 824d (providing that rates 
must be just and reasonable).
    \2\ The following RTOs and ISOs have organized wholesale 
electricity markets: PJM Interconnection, LLC (PJM); New York 
Independent System Operator, Inc. (NYISO); Midwest Independent 
Transmission System Operator, Inc. (MISO); ISO New England Inc. 
(ISO-NE); California Independent System Operator Corp. (CAISO); and 
Southwest Power Pool, Inc. (SPP).
    \3\ ``Ramping'' or the ability to ``ramp'' is traditionally 
defined as the ability to change the output of real power from a 
generating unit per some unit of time, usually measured as megawatts 
per minute (MW/min). A generator ramps up to produce more energy and 
ramps down to produce less. A storage device ramps up by discharging 
energy and ramps down by charging. A demand response resource, in 
the context of the provision of frequency regulation, ramps up by 
consuming less energy and ramps down by consuming more.
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    2. The Commission finds that current frequency regulation 
compensation practices of RTOs and ISOs result in rates that are 
unjust, unreasonable, and unduly discriminatory or preferential. 
Specifically, current compensation methods for regulation service in 
RTO and ISO markets fail to acknowledge the inherently greater amount 
of frequency regulation service being provided by faster-ramping 
resources.\4\ In addition, certain practices of some RTOs and ISOs 
result in economically inefficient economic dispatch of frequency 
regulation resources.
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    \4\ Both existing market participants and potential entrants are 
affected by inefficient pricing. It is possible that existing market 
participants would offer faster ramping capabilities to the system 
operator in response to a pricing scheme that recognized such 
service.
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    3. By remedying these issues, the Commission is removing unduly 
discriminatory and preferential practices from RTO and ISO tariffs and 
requiring the setting of just and reasonable rates. Specifically, this 
Final Rule requires RTOs and ISOs to compensate frequency regulation 
resources based on the actual service provided, including a capacity 
payment that includes the marginal unit's opportunity costs and a 
payment for performance that reflects the quantity of frequency 
regulation service provided by a resource when the resource is 
accurately following the dispatch signal.

I. Background

A. Frequency Regulation Service

    4. Frequency regulation\5\ service is the injection or withdrawal 
of real power by facilities capable of responding

[[Page 67261]]

appropriately to a transmission system operator's automatic generator 
control (AGC) signal. When dispatched generation does not equal actual 
load plus losses on a moment-by-moment basis, the imbalance will cause 
the grid's frequency to deviate from 60 Hertz, the standard in the U.S. 
While the system does deviate from 60 Hz in the normal operation of the 
grid, frequency deviations outside an acceptable range negatively 
affect energy consuming devices; major deviations cause generation and 
transmission equipment to disconnect from the grid, in the worst case 
leading to a cascading blackout. Frequency regulation service can help 
to prevent these adverse consequences by rapidly correcting deviations 
in the transmission system's frequency to bring it within an acceptable 
range.\6\ The system operator calibrates the AGC signal sent to 
frequency regulation resources to respond to actual and anticipated 
frequency deviations or interchange power imbalance, both measured by 
area control error (ACE).
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    \5\ Frequency regulation, or secondary frequency control, is 
distinguishable from frequency response, or primary frequency 
control, for the purposes of this rulemaking. The latter, i.e., 
frequency response, involves the automatic, autonomous and rapid 
action of turbine governor control to change a generator's output 
and of demand response resources to change consumption in automatic 
response to changes in frequency. This occurs independently of any 
dispatch signal from a system operator. On January 20, 2011, the 
Commission released for public comment a staff study evaluating the 
use of frequency response metrics as a tool to assess the 
reliability impacts of varying resource mixes on the transmission 
grid.
    \6\ A balancing authority achieves acceptable ranges by being in 
compliance with Control Performance Standards 1 and 2 as defined in 
the Commission-approved Reliability Standard BAL-001-0.1a.
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    5. Today, frequency regulation is largely provided by generators 
(e.g., water, steam and combustion turbines) that are specially 
equipped for this purpose. Provision by other resources is emerging, as 
technologies develop and tariff and market rules adapt to accommodate 
new resources. For example, the Texas Interconnection and MISO 
currently use controllable demand response in addition to generators to 
provide frequency regulation service. Such ``regulation capable'' 
generation, storage devices, and demand response resources can respond 
automatically to signals sent by the RTO or ISO, through AGC, to 
increase or decrease real power injections or withdrawals and thereby 
correct actual or anticipated frequency deviations or interchange 
schedule imbalance, as measured by the ACE. The faster a resource can 
ramp up or down, the more accurately it can respond to the AGC signal 
and avoid overshooting.\7\ Alternatively, when a resource ramps too 
slowly, its ramping limitations may cause it to work against the needs 
of the system and force the system operator to commit additional 
regulation resources to compensate.
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    \7\ See Beacon Power Corporation (Beacon), Technical Conference 
Speaker Materials, at Figure 3, which shows the difference between 
ISO-NE's ACE control signal, Beacon's flywheel response, and the 
allowable response rate under current ISO-NE rules. Here, 
``allowable response rate'' means the rate at which the resource 
must respond to be considered in compliance with the dispatch 
signal. Frequency Regulation Compensation in the Organized Wholesale 
Power Markets, Docket No. AD10-11-000 (May 26, 2010).
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B. Current RTO and ISO Compensation Practices

    6. In the RTO and ISO markets, compensation for frequency 
regulation service is presently based on several components. Depending 
on the RTO or ISO, these payments include consideration for capacity 
set aside to provide the service \8\ as well as some of the following: 
the net energy that the resource injects into the system; accurately 
following the RTO's or ISO's dispatch signal; and the absolute (rather 
than net) amount of energy injected or withdrawn. These payments are 
intended to cover the range of costs incurred in providing frequency 
regulation service, e.g., operation and maintenance costs, and loss of 
potential revenue from foregone sales of electricity.
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    \8\ This type of capacity payment is distinguishable from 
capacity payments associated with the procurement of resources to 
meet planning reserve margin requirements.
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    7. The payment for capacity is essentially an option payment to the 
resource to keep a certain amount of capacity out of the energy or 
other markets in order to provide frequency regulation service, 
typically based on a market clearing price per MW of capacity sold. 
ISO-NE, NYISO, MISO, California ISO, and PJM incorporate into this 
payment the opportunity cost of foregone energy sales incurred by a 
resource that provides frequency regulation service. However, ISO-NE 
and PJM do not apply the opportunity cost payment uniformly to all 
cleared resources, but rather make ex post resource-specific 
opportunity cost payments.
    8. Compensation for frequency regulation service also includes 
payments or charges for the net energy the resource injects into or 
withdraws from the system. All RTOs and ISOs currently provide a 
payment for the net energy injected by a resource providing regulation 
service during the operating hour, calculated as the amount of energy 
injected less energy withdrawn multiplied by the real-time energy 
price.
    9. Accuracy of performance can also be incorporated into payments 
for frequency regulation service. Currently, NYISO incorporates 
accuracy into its compensation for frequency regulation service through 
a penalty that reflects the accuracy with which the resource follows 
its dispatch instruction.\9\ This is done through a performance index 
that tracks how accurately a resource follows the dispatch signal.\10\
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    \9\ NYISO, Ancillary Services Manual, Manual 2 (Nov. 2010), 
http://www.nyiso.com/public/webdocs/documents/manuals/operations/ancserv.pdf.
    \10\ NYISO uses telemetry data to track how closely a frequency 
regulation resource's output is to the dispatch signal. NYISO then 
adjusts the resource's payments to reflect its accuracy. For 
example, if the resource's response falls outside an acceptable 
range 10 percent of the time, for a performance index of 0.9, it 
will receive 90 percent of its payment.
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    10. ISO-NE makes payments for frequency regulation service to 
reflect the amount of work performed by a resource by reflecting the 
absolute amount of energy injected and withdrawn, sometimes referred to 
as a ``mileage'' payment. Mileage payments are intended to reward those 
resources that perform more regulation service instead of simply 
netting the total amount of energy injected by the resource.\11\
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    \11\ ISO-NE., Market Operations Manual M-11, at 3-11 (Dec. 
2010), available at http://www.iso-ne.com/rules_proceds/isone_mnls/m_11_market_operations_revision_35_12_01_10.doc.
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    11. In general, when a resource submits its frequency regulation 
bid to the RTO or ISO, the bid is typically required to include its 
ramp rate in MW/min, its cost per megawatt-hours (MWh) of ramping 
ability, and the total capacity it is offering for frequency 
regulation.\12\ The resource's total amount of capacity is based on and 
limited by its ability to ramp up or down.\13\ For example, a resource 
with a relatively large amount of capacity, but a relatively slow ramp 
rate would be limited in how much capacity it could offer as frequency 
regulation capacity. If the resource can ramp one MW per minute, it 
would only be able to offer five MW of regulation capacity (for a five 
minute dispatch) regardless of its total capacity. On the other hand, a 
smaller capacity, faster ramping resource might not face such a 
constraint. For instance, a storage device that can hold a 20 MW charge 
and ramp at 10 MW per minute, could offer its full 20 MW of capacity 
for five minutes.
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    \12\ See, e.g., NYISO, Ancillary Services Manual, Manual 2, at 
4-8 (Nov. 2010).
    \13\ A resource's capacity is limited by the amount it can ramp 
in five minutes because the system operator in most RTOs and ISOs 
dispatch resources every five minutes. CAISO dispatches every 10 
minutes, and so a frequency regulation resource's capacity in that 
market is bound by the total capacity it can ramp in 10 minutes.
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    12. The Commission recognizes that some RTOs and ISOs are 
considering changes to their frequency regulation markets.\14\ For 
example, in February of

[[Page 67262]]

this year PJM established a ``Regulation Performance Senior Task 
Force'' to examine the existing PJM regulation market's inability to 
distinguish between resources' various levels of performance and the 
absence of additional compensation for the resources to perform at a 
high level once they have qualified for the regulation market.\15\ 
Therefore, the Commission believes that this Final Rule is timely, in 
that it will help guide these various stakeholder processes.
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    \14\ In addition to the examples cited here, SPP is in the 
process of developing its integrated marketplace that will include a 
day-ahead market and consolidated ancillary services market.
    \15\ See PJM Regulation Performance Senior Task Force Charter at 
1 (2011) and ISO-NE., Report of ISO New England Inc. Regarding the 
Implementation of Market Rule Changes to Permit Non-Generating 
Resources to Participate in the Regulation Market, Docket No. ER08-
54-014, at 5 (June 17, 2010).
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C. Commission Inquiries Leading to This Rulemaking

    13. On May 26, 2010, the Commission hosted a publicly noticed 
technical conference \16\ inviting various stakeholders, including 
representatives from the RTOs and ISOs, industry, and academia to share 
their views on whether current frequency regulation market designs 
reflect the value of the service provided, and whether the use of 
faster-ramping resources for frequency regulation has the potential to 
provide benefits to the organized markets.
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    \16\ See Final Agenda, Frequency Regulation Compensation in the 
Organized Wholesale Power Markets, Docket No. AD10-11-000 (May 26, 
2010).
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    14. On February 17, 2011, the Commission issued a Notice of 
Proposed Rulemaking in this proceeding,\17\ seeking comment on its 
proposal to require both a uniform price for frequency regulation 
capacity paid to all cleared resources as well as a performance payment 
for the provision of frequency regulation service, with the latter 
payment reflecting a resource's accuracy of performance.\18\
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    \17\ Frequency Regulation Compensation in the Organized 
Wholesale Power Markets, 76 FR 11,177, 134 FERC ] 61,124 (2011) 
(NOPR).
    \18\ See Appendix for a list of commenters.
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II. Discussion

A. The Need for Reform

    15. As discussed below, the Commission finds that current frequency 
regulation compensation practices in organized wholesale electricity 
markets which fail to compensate resources for all of the service they 
provide as part of that service are unjust, unreasonable, and unduly 
discriminatory or preferential.
1. NOPR Preliminary Finding
a. Unduly Discriminatory Pricing
    16. In the NOPR, the Commission stated that the current rules that 
govern pricing and compensation for frequency regulation services in 
RTOs and ISOs may be unduly discriminatory, because resources are 
compensated at the same level even when providing different amounts of 
frequency regulation service.\19\
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    \19\ NOPR, 134 FERC ] 61,124 at P 27.
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    17. Specifically, the Commission was concerned that under some 
existing frequency regulation compensation methods, resources may not 
be compensated for all of the service they provide even when given 
preference in the dispatch order and asked to provide more frequency 
regulation service than other resources. The Commission noted, for 
example, that CAISO, NYISO, MISO, and PJM pay a capacity payment to all 
resources that clear the frequency regulation market, and then net the 
amount of regulation up and regulation down provided by these resources 
in order to compensate for the energy costs they incur. The Commission 
preliminarily found that this compensation method does not acknowledge 
the greater amount of frequency regulation service being provided by 
faster-ramping resources.\20\ It stated that, as a result, slower-
responding resources are compensated as if they are providing the same 
amount of service when, in reality, they are not,\21\ and that slower, 
larger resources are being given a compensatory advantage for their 
size while faster, smaller resources do not similarly receive 
compensation for their ramping speed and actual service provided.
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    \20\ A simplified example would be to consider two resources 
that clear with the same amount of capacity and are directed to 
provide regulation up and regulation down over the course of a five-
minute interval. The fast-ramping resource might be directed to move 
around an initial output level up five MW, then down three MW, up 
one MW, down ten MW, and finally up nine MW. A netting approach to 
compensation would determine that the resource provided an 
additional two MW of energy to the system (+ 5 - 3 + 1 - 10 + 9 = + 
2) during that five minute interval. Meanwhile, a slower-ramping 
resource may be directed to move up three MW and then down one MW 
for a net of two MW in relation to its initial output level. The 
operator is not able to direct more movement because the slower-
ramping resource would not be able to respond in the requisite time 
frame. Both resources would receive identical compensation for their 
movement, despite the first resource providing more ACE correction.
    \21\ NOPR, 134 FERC ] 61,124 at P 28.
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    18. The Commission also expressed concern that the manner in which 
some resources that provide frequency regulation service are 
compensated for their opportunity costs \22\ may be unduly 
discriminatory.\23\ For instance, while PJM provides an ex ante 
estimate of opportunity costs that is included in the uniform clearing 
price, it also provides ex post ``make whole'' payments based on 
individual unit opportunity costs, something that is not reflected in 
the uniform market clearing price calculation; \24\ ISO-NE pays 
opportunity costs on a resource-specific basis so that the market-
clearing price for frequency regulation service does not reflect any 
opportunity costs. Both of these methods have the potential to 
inefficiently select regulating resources and also fail to reflect the 
marginal cost (including opportunity cost) that determines the market-
clearing price paid to all cleared suppliers. Therefore, the NOPR 
proposed to require that all resource bids include opportunity costs 
and that all cleared frequency regulation resources be paid the single 
market clearing price, which reflects the total marginal costs of the 
marginal cleared unit.\25\
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    \22\ When participating in the energy and frequency regulation 
markets, a resource is dispatched at a set-point below its maximum 
capacity. Because this amount of capacity is held in reserve to 
provide frequency regulation, the resource misses the opportunity to 
provide energy at the current LMP.
    \23\ NOPR, 134 FERC ] 61,124 at P 31.
    \24\ PJM, Manual 18: Operating Agreement Accounting, at 12-16, 
available at http://www.pjm.com/~/media/documents/manuals/m28.ashx.
    \25\ NOPR, 134 FERC ] 61,124 at P 31.
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b. Potential Market Efficiency Gains
    19. The NOPR also preliminarily found that the use of faster-
ramping resources for frequency regulation has the potential to improve 
operational and economic efficiency and, in turn, lower costs to 
consumers in the organized markets. Faster-ramping resources may be 
able to replace resources that currently provide frequency regulation, 
so that RTOs and ISOs may be able to procure less regulation capacity, 
thereby lowering costs to load.
2. Comments
a. Unduly Discriminatory Pricing
    20. Many commenters expressly support the NOPR's proposed 
performance payment to reflect the amount of frequency regulation 
provided by a resource.\26\ They

[[Page 67263]]

generally argue that for a frequency regulation compensation mechanism 
to be just and reasonable it must compensate providers for the service 
they actually provide to the grid. They argue that the compensation 
systems currently used in the RTOs and ISOs are not only unduly 
discriminatory but also problematic because they send inefficient price 
signals. In addition, they generally advocate that a performance 
payment for regulation will incent participants to offer more 
flexibility to the system operator and will compensate resources for 
the value they provide the grid.\27\
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    \26\ A123, Alcoa, Beacon, CESA, Duke, ESA, EDF, EPSA, ELCON, 
ENBALA, EnerNOC, Invenergy, ISO-NE., Manitoba Hydro, MISO, MSCG, 
NaturEner, NECPUC, NEPOOL, OMS, PaPUC, PG&E, Powerex, Primus Power, 
PIOs, PJM, SoCal Edison, Starwood/Premium, SunEdison, VCharge, 
Viridity, and Xtreme Power all submitted comments supporting the 
proposal to require a performance payment. Some have offered 
alternative means to accomplish the same goal, as described below.
    \27\ See, e.g., EDF May 2, 2011 Comments at P 14 and P 16, CESA 
May 2, 2011 Comments at 2 and 8, ENBALA May 2, 2011 Comments at 8, 
ELCON May 2, 2011 Comments at 4, Manitoba Hydro April 27, 2011 
Comments at 2 (citing Prowse, D. ``Improvements to a Standard 
Automatic Generation Control Filter Algorithm'' IEEE/PES Summer 
Power Meeting, 92 SM 451-5 PWRS), OMS May 2, 2011 Comments at 6, 
Primus Power April 18, 2011 Comments at 5-6, PIOs May 3, 2011 
Comments at 5-7, PJM May 2, 2011 Comments at 6, SoCal Edison May 2, 
2011 Comments at 3, Starwood/Premium May 2, 2011 Comments at 4-5, 
Viridity May 2, 2011 Comments at 1, Xtreme Power May 2, 2011 
Comments at 6-7.
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    21. Alcoa supports the proposal that compensation for frequency 
regulation service reflect the absolute (rather than net) energy the 
resource injects into or withdraws from the system. Alcoa states that 
compensating for the amount of movement creates strong market signals 
because it ensures that those resources that are performing more work 
to correct system deviations are rewarded more. It contends that this 
aligns with the physical reality that the more the resource is moved, 
the more wear will occur on the equipment and the higher the cost of 
supplying the service.\28\
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    \28\ Alcoa May 2, 2011 Comments at 3-4.
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    22. Beacon contends that, currently, all resources (except in ISO-
NE), regardless of how frequently they are deployed or how much of the 
ACE correction they provide, are paid the same price per MW for their 
capacity offered. Beacon contends that no payment is based on how much 
the resource is actually deployed to provide frequency regulation.\29\ 
Beacon argues that this is unjust and unreasonable. Similarly, PIOs 
argue that NYISO's and MISO's frequency regulation markets fail to 
ensure just and reasonable treatment of faster-ramping regulation 
resources, and do not provide the proper economic incentive for 
efficient market participation.\30\
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    \29\ Beacon May 2, 2011 Comments at 20-21, ESA May 2, 2011 
Comments at 19-20.
    \30\ PIOs May 2, 2011 Comments at P 16.
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    23. In order to illustrate the undue discrimination that can occur 
in frequency regulation markets, Beacon provides data from its own 1 MW 
flywheel operating in the ISO-NE market, contending that these data 
demonstrate that its resource provides more than four times as much 
frequency regulation service to ISO-NE as would a 1 MW resource with an 
allowable ramp rate of 1 MW/5 minutes.\31\ It contends that the 
flywheel provides 0.48 MWh while the slower ramping resource provides 
0.11 MWh. Beacon states that the reason its flywheel is able to provide 
more frequency regulation service is not just because of its faster 
ramping ability, but also because it is able to switch the direction of 
the resource nearly instantaneously.\32\ In a frequency regulation 
market paying only a capacity payment, Beacon's flywheel will have 
performed a greater amount of frequency regulation service, yet 
received the same payment as the other resource.
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    \31\ Beacon May 2, 2011 Comments at 6-7. These data are the same 
data on which the table in Appendix A of the NOPR is based.
    \32\ Beacon May 2, 2011 Comments at 7.
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    24. Beacon and ESA argue that a performance payment system is 
needed in order to send efficient price signals and to compensate 
resources that are asked to do more work. Beacon and ESA maintain that 
this form of pricing will appropriately compensate resources and 
encourage the RTOs and ISOs to improve operational and economic 
efficiencies, thereby lowering costs to consumers.\33\ In support of 
its arguments, Beacon points to operating data from its flywheel in 
NYISO comparing the actual performance of its flywheel to a 
hypothetical, similarly sized slower resource to determine how much 
each resource would contribute to frequency regulation service.\34\ 
Beacon states that even though the flywheel would have been dispatched 
to provide more than twelve times as much frequency regulation service, 
its flywheel would have actually been paid less than the slower-
responding resource that provided less service to the system.\35\
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    \33\ Beacon May 2, 2011 Comments at 26-27, ESA May 2, 2011 
Comments at 24-25.
    \34\ See Beacon May 2, 2011 Comments at 22-24.
    \35\ Beacon May 2, 2011 Comments at 24 (citing NYISO Tariff, 
Section 15.3.2.1(d), Regulation Service Offers from Limited Energy 
Storage Resources. ``The ISO may reduce the real-time Regulation 
Service offer (in MWs) from a Limited Energy Storage Resource to 
account for the Energy storage capacity of such Resource.''). See 
also ESA May 2, 2011 Comments at 21-23 (providing a numerical 
example of how a two-part payment system can result in cost savings 
in the procurement of frequency regulation capacity and service).
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    25. Beacon also provides an example of five 20 MW resources with 
different ramp rates--two average resources, two slower resources, and 
one faster resource--that are dispatched and paid based only on the 
amount of capacity offered. Beacon asserts that if these resources were 
to be paid for both capacity and performance, the system operator could 
reduce the amount of capacity procured by 40 percent while obtaining 
the same amount of regulation service. Assuming a $10 decrease in the 
capacity price and a $1.00/MW mileage rate, Beacon estimates a 
reduction in total regulation cost of 27 percent, in addition to 
releasing 40 MW of generation to provide energy or other reserves.\36\
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    \36\ Beacon May 2, 2011 Comments at 33-36.
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    26. PJM states that it strongly supports a performance-based 
methodology. PJM claims that a performance payment provides an 
appropriate incentive to provide high quality regulation service by 
tying a portion of the total compensation to a resource's performance. 
In addition, PJM asserts that a performance payment will ensure 
resources provide accurate responses to control signals, in contrast 
with the current structure that provides no incentive to perform above 
a minimum threshold.\37\
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    \37\ PJM May 2, 2011 Comments at 6.
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    27. Among the RTOs and ISOs, only CAISO makes the claim that its 
markets are not unduly discriminatory or preferential. CAISO asserts 
that the Commission cannot declare the existing rate unjust and 
unreasonable or unduly discriminatory based on an unsupported 
conclusion that all markets require more ACE correction.\38\ Indeed, 
CAISO argues that its operational and reliability requirements, 
including ACE correction, have been and continue to be adequately met 
by existing regulation services and resources. Furthermore, CAISO 
argues that its rates for regulation apply to all resources equally so 
long as the resource meets the minimum operating and technical 
requirements to provide regulation because the amount of capacity a 
resource may bid for regulation is based upon the resource's certified 
ramp rate over a ten minute interval. It contends that, therefore, a 
faster-ramping resource can sell more regulation capacity than a slower 
ramping resource. It argues that these terms and conditions of service 
provide comparable treatment for all resources certified to provide 
regulation.\39\ CAISO also argues that while its energy management 
system does not include a priority dispatch for resources with faster-
ramping capability, its system will send control

[[Page 67264]]

signals to faster ramping resources if it requires a fast response to 
correct ACE. Control signals are sent in part based on a resource's 
operating range and ramping capability.\40\
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    \38\ CAISO May 2, 2011 Comments at 6-7.
    \39\ CAISO May 2, 2011 Comments at 8.
    \40\ Id. at 9.
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    28. Some commenters argue that the Commission has failed to show a 
sufficient basis for exercising its section 206 authority to mandate 
revisions to existing RTO and ISO tariff provisions.\41\ CAISO argues 
it has and continues to meet its operational and reliability 
requirements, and pays equally all resources capable to meet the 
requirement. As such, CAISO argues, its markets are not unduly 
discriminatory or preferential.
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    \41\ EEI May 2, 2011 Comments at 9-10, TAPS May 2, 2011 Comments 
at 5.
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    29. EEI contends that the Commission has not shown that changing 
the compensation mechanism to increase compensation for faster ramping 
resources will result in enhanced reliability or enable system 
operators to more easily meet reliability standards; that the 
Commission is looking at only one of the three elements of frequency 
response (inertial response and governor response being the others) and 
in doing so has failed to provide the necessary technical basis to 
demonstrate that its assumptions that resources providing frequency 
regulation are more valuable than resources providing the other 
services and that the resulting payments are unduly discriminatory. 
Similarly, NGSA argues that regulatory policies that focus singly on 
special forms of compensation and incentives for some forms of 
ancillary and balancing services, but not others, are likely to result 
in distorted market signals and a mix of services and products that are 
sub-optimal for meeting system balancing requirements. NGSA contends 
that there is a direct interrelationship between primary and secondary 
frequency control, and compensation for frequency regulation cannot be 
considered in isolation.\42\
---------------------------------------------------------------------------

    \42\ NGSA May 2, 2011 Comments at 4.
---------------------------------------------------------------------------

    30. TAPS also argues that the existing total compensation for 
frequency regulation has not been shown to be unjust and unreasonable. 
TAPS contends that any increased payments to faster-ramping resources 
must be balanced by savings through reduced regulation procurement or 
lower payments to slower resources, such that costs to consumers are 
reduced.\43\
---------------------------------------------------------------------------

    \43\ TAPS May 2, 2011 Comments at 5.
---------------------------------------------------------------------------

    31. Duke argues that the Commission should not favor or subsidize 
one type of resource over another.\44\ It contends that both fast- and 
slow-ramping resources have a role to play and there will be instances 
when operators will not need faster-ramping resources to address 
frequency deviations. As an example, Duke states that there will be a 
need for slower-ramping resources that ramp with the load over a five 
minute period (e.g., load following).\45\
---------------------------------------------------------------------------

    \44\ See also CAREBS May 2, 2011 Comments at 5-6, AWEA May 2, 
2011 Comments at 3-4, Duke May 2, 2011 Comments at 4-5, ELCON May 2, 
2011 Comments at 6, SoCal Edison May 2, 2011 Comments at 6.
    \45\ Duke May 2, 2011 Comments at 4-6.
---------------------------------------------------------------------------

    32. EEI argues that the Commission failed to support the NOPR 
proposal as just and reasonable, because, according to EEI, the 
Commission did not explain how the two-part payment mechanism will 
enhance reliability or make compliance with reliability rules easier or 
cheaper for system operators. EEI claims that no substantial pilot 
programs have been conducted to evaluate the system cost and 
reliability impacts of substituting non-traditional resources for 
existing resources. EEI suggests that the Commission encourage the 
development of network pilot programs before requiring a revision of 
frequency regulation service.\46\
---------------------------------------------------------------------------

    \46\ EEI May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

    33. Several commenters express concern that the Commission will act 
prematurely, without a full record addressing the various issues to 
which the NOPR was addressed.\47\ For example, NGSA, among others, 
cited Commissioner Spitzer's dissent to the NOPR, arguing that feedback 
is needed from a broad spectrum of industry participants; otherwise the 
record on which to make the proposed changes to the Commission's 
regulations may be undermined.\48\ The NY TOs contend that the record 
is insufficient to support a conclusion that the NYISO-administered 
markets fail to adequately compensate fast response resources.\49\
---------------------------------------------------------------------------

    \47\ CAISO May 2, 2011 Comments at 11-12, Duke May 2, 2011 
Comments at 2, EEI May 2, 2011 Comments at 10 (supported by Dayton, 
Detroit Edison, and FirstEnergy), Jack Ellis May 2, 2011 Comments at 
7, MISO TOs May 2, 2011 Comments at 5.
    \48\ Natural Gas Supply Association May 2, 2011 Comments at 5.
    \49\ New York Transmission Owners May 2, 2011 Comments at 1.
---------------------------------------------------------------------------

b. Potential Market Benefits
    34. The primary economic benefit that some commenters expect to see 
is reduced costs of procuring frequency regulation capacity, with a 
secondary benefit of reduced energy costs.\50\ Commenters argue that 
faster-ramping resources are able to provide more frequency regulation 
service from the same amount of frequency regulation capacity because 
faster-ramping resources can provide more ACE correction in real-time. 
Commenters conclude that this will result in a system operator needing 
to procure less frequency regulation capacity.\51\ Commenters further 
explain that, as these faster-responding resources displace slower-
ramping resources, existing generators that are displaced can be 
shifted to provide an even greater amount of energy. These traditional 
resources can then run at their full capacity at their preferred 
steady-state operating point which improves their heat rate and reduces 
the wear and tear on their equipment, thereby lowering their cost to 
operate.\52\
---------------------------------------------------------------------------

    \50\ See, e.g., Beacon May 2, 2011 Comments at 5, ESA May 2, 
2011 Comments at 3, EDF May 2, 2011 Comments at P 5-7, EDF May 2, 
2011 Comments at P 9, ENBALA May 3, 2011 Comments at 3, NEPOOL May 
2, 2011 Comments at 6, PaPUC May 2, 2011 Comments at 5, PJM May 2, 
2011 Comments at 3-4.
    \51\ SoCal Edison May 2, 2011 Comments at 3.
    \52\ Beacon May 2, 2011 Comments at 11, CESA May 2, 2011 
Comments at 5, ENBALA May 3, 2011 Comments at 4, ESA May 2, 2011 
Comments at 11, and PaPUC May 2, 2011 Comments at 5 and Snowberger 
Affidavit at 8.
---------------------------------------------------------------------------

    35. Commenters cite several studies to support the argument that 
faster-responding resources will result in economic benefits. Among 
them is PNNL's study showing that fast-ramping energy storage resources 
(such as flywheels and batteries) could be as much as 17 times more 
effective than conventional ramp-limited regulation resources because 
of how quickly and accurately they respond to a system imbalance; \53\ 
and a California Energy Commission study which showed that ``on an 
incremental basis, storage can be up to two to three times as effective 
as adding a combustion turbine to the system for regulation purposes.'' 
\54\
---------------------------------------------------------------------------

    \53\ Makarov, Y.V., Ma, J., Lu, S., Nguyen, T.B., ``Assessing 
the value of Regulation Resources Based on Their Time Response 
Characteristics,'' Pacific Northwest National Laboratory, PNNL--
17632, June 2008.
    \54\ Beacon May 2, 2011 Comments at 8-9 (citing KEMA, ``Research 
Evaluation of Wind Generation, Solar Generation, and Storage Impact 
on the California Grid'' (prepared for the California Energy 
Commission), June, 2010).
---------------------------------------------------------------------------

    36. Commenters also pointed to ISO-NE and NYISO as examples of 
markets that have a relatively high number of faster-responding 
frequency regulation resources. In both cases, the system operator is 
able to procure a relatively smaller amount of frequency regulation 
capacity, compared to other RTOs and ISOs. Beacon notes that ISO-NE. 
the only RTO or ISO to both dispatch faster-ramping resources first and 
then compensate resources based on performance, is able to procure the 
least frequency regulation capacity, measured

[[Page 67265]]

as a percentage of peak load.\55\ EDF also notes that ISO-NE and NYISO, 
two balancing authority areas with relatively high concentrations of 
faster-responding resources, procure relatively less frequency 
regulation capacity.\56\
---------------------------------------------------------------------------

    \55\ Beacon May 2, 2011 Comments at 9-10. See also ESA May 2, 
2011 Comments at 9-10.
    \56\ EDF May 2, 2011 Comments at P 8.
---------------------------------------------------------------------------

    37. ISO-NE agrees that fast-ramping resources provide benefits in 
the regulation market and states that the participation of fast-ramping 
resources in the New England regulation market is a factor in New 
England's low current regulation requirement. ISO-NE also states that 
all other things being equal, faster response is clearly better than 
slower response, for the reasons explained in the NOPR. PJM also argues 
the importance of procuring a mix of frequency regulation resources, 
some of which will have the ability to sustainably maintain their 
response.\57\ Likewise, SoCal Edison states that the use of faster-
ramping regulation resources, in conjunction with an efficient 
regulation dispatch algorithm and effective unit compliance with the 
dispatch signal should reduce the total amount of regulation capacity 
needed to perform regulation service.\58\
---------------------------------------------------------------------------

    \57\ PJM May 2, 2011 Comments at 4.
    \58\ SoCal Edison May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    38. PIOs state that PJM estimates that a 10 percent or 20 percent 
reduction in its frequency regulation capacity procurement could result 
in a $25 million or $50 million, respectively, reduction in costs to 
consumers. PIOs state that this savings is large in comparison to the 
modest software costs required to implement these market rules.\59\
---------------------------------------------------------------------------

    \59\ PIOs May 2, 2011 Comments at P 20 (citing PJM Staff, 
``Problem Statement,'' Jan. 19, 2011), available at http://
www.pjm.com/~/media/committees-groups/committees/mrc/20110216/
20110216-item-05-regulation-resource-performance-problem-
statement.ashx. The Problem Statement was presented to the PJM 
Markets and Reliability Committee, and led to the establishment of a 
PJM Regulation Performance Senior Task Force.
---------------------------------------------------------------------------

    39. To illustrate the potential benefits of faster-ramping 
resources providing frequency regulation service, Primus Power extends 
the Beacon Power example \60\ to one that applies more generally. 
Primus Power simulates the output of both what they define as a 
traditional resource and a fast-response resource. Both resources were 
assumed to have a capacity of 1 MW; the traditional resource could ramp 
1 MW in 5 minutes, while the faster-response resource could ramp 
faster, mimicking the actual ability of a Primus Power energy storage 
resource. Primus Power's result supports that of Beacon, with the 
faster-responding resource following the AGC signal nearly perfectly, 
while the slower-ramping resource lags to the point of working against 
needed ACE correction.\61\ Primus Power claims that this results in the 
faster-ramping resource providing approximately 76 percent more ACE 
correction.\62\
---------------------------------------------------------------------------

    \60\ Primus Power May 2, 2011 Comments at 2.
    \61\ Id. at 3.
    \62\ Id. at 5.
---------------------------------------------------------------------------

    40. Commenters also mention the potential for reliability benefits 
stemming from the NOPR proposal. A123, Alcoa, Beacon, CESA, ESA, PIOs, 
and PJM all state that system operators can also expect to see 
reliability benefits from the integration of more faster-responding 
resources. PIOs state that the integration of more faster-responding 
resources will result in enhanced reliability because their ability to 
more quickly and accurately follow dispatch instructions will allow the 
system operator to better maintain system balance. Further, PIOs state 
that the concern over sustainability is unfounded. First, PIOs state 
that there is little reason to believe that faster-responding resources 
will completely displace traditional resources in the short or near 
term. Second, PIOs state that, given the short dispatch window system 
operators use, i.e. 5 or 10 minute dispatch intervals, storage systems 
can be assured of maintaining appropriate charge.\63\
---------------------------------------------------------------------------

    \63\ PIOs May 2, 2011 Comments at P 22-23.
---------------------------------------------------------------------------

    41. Xtreme Power argues that the advantages of fast response 
storage systems is that they do not have problems such as efficiency 
degradation, emissions, exposure to peaking fuel prices, accelerated 
O&M, and typical siting issues. Xtreme Power also states that fast 
response storage systems do not require air quality permits like 
conventional fossil-fired generation resources, and can therefore be 
deployed to satisfy RTO or ISO needs for additional regulation service 
more quickly than new fossil-fired generation.\64\
---------------------------------------------------------------------------

    \64\ Xtreme Power May 2, 2011 Comments at 4-5.
---------------------------------------------------------------------------

    42. A123 presents data from ERCOT indicating that incorporating 
storage resources capable of responding to a ``ramp-focused'' signal 
from the system operator will result in net ACE remaining within 
allowable NERC standards 100 percent of the time (as opposed to only 71 
percent of the time when relying on traditional resources responding to 
a slower signal). A123 argues that this improvement will provide the 
system operator with a larger reliability margin. A123 presents this 
analysis as an illustration of the difference between traditional 
slower-ramping, unlimited energy resources and faster-ramping, limited 
energy resources.\65\
---------------------------------------------------------------------------

    \65\ A123 May 2, 2011 Comments at 6.
---------------------------------------------------------------------------

    43. Alcoa contends that the NOPR proposal is likely to result in 
increased efficient operation of demand side resources and therefore a 
decrease in the amount of resources dedicated to frequency regulation 
service.\66\ Alcoa contends that there are reliability benefits from 
integrating more direct load control demand response into system 
operations because these resources can ramp faster and therefore help 
restore system frequency more rapidly in the event of a system upset. 
Alcoa states that because this response can happen within seconds, it 
can help avert cascading system instability.\67\
---------------------------------------------------------------------------

    \66\ Alcoa May 2, 2011 Comments at 5.
    \67\ Id. at 4.
---------------------------------------------------------------------------

    44. PJM states that the use of faster-ramping resources will 
enhance system control. Better control will then lead to a reduction in 
uncompensated flows imposed on the system by a given balancing 
authority and will provide better individual control by that balancing 
authority.\68\
---------------------------------------------------------------------------

    \68\ PJM May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    45. Beacon and ESA agree that the use of faster-ramping resources 
can result in reliability benefits, based on the expectation that the 
United States will add 145,000 MW of wind generation to the grid over 
the next ten years. They argue that this will result in increased 
supply variability, requiring increased system flexibility.\69\ In the 
same vein, Beacon and ESA both cite CAISO's 20 percent renewable 
portfolio standard study, which showed that CAISO will require an 
additional 37 percent of regulation up and 11 percent of regulation 
down in the summer season.\70\
---------------------------------------------------------------------------

    \69\ Beacon May 2, 2011 Comments at 11-12, ESA May 2, 2011 
Comments at 11, (citing Rick Sergel, President and CEO, North 
American Electric Reliability Corporation, Executive Remarks, FERC 
Technical Conference on Integrating Renewable Resources into the 
Wholesale Electric Grid, March 2, 2009).
    \70\ Beacon May 2, 2011 Comments at 12, ESA May 2, 2011 Comments 
at 11-12 (citing CAISO, ``Integration of Renewable Resources: 
Operational Requirements and Generation Fleet Capability at 20% 
RPS,'' at 52, table 3.3 (2010), available at: http://www.caiso.com/2804/2804d036401f0.pdf).
---------------------------------------------------------------------------

    46. In addition Beacon and ESA assert that NYISO expects to need 
increased regulation and reserve resources as more wind is integrated 
into its system.\71\ Beacon, CESA, and ESA also points to the 
Commission-sponsored, Lawrence Berkeley National Laboratory (LBNL)

[[Page 67266]]

report that identified reliability concerns due to the declining 
frequency responsiveness of the US interconnections. In order to 
address these reliability concerns, LBNL recommends expanding the 
frequency control capability of the RTO and ISO interconnections using 
advanced technologies such as energy storage.\72\
---------------------------------------------------------------------------

    \71\ Beacon May 2, 2011 Comments at 12, ESA May 2, 2011 Comments 
at 11 (citing NYISO, ``Integration of Wind into System Dispatch 
White Paper,'' October 2008).
    \72\ Beacon May 2, 2011 Comments at 13-14, CESA May 2, 2011 
Comments at 6, ESA May 2, 2011 Comments at 13-14 (citing Joseph H. 
Eto, Use of Frequency Response Metrics to Assess the Planning and 
Operating Requirements for Reliable Integration of Variable 
Renewable Generation Lawrence Berkeley National Laboratory, LBNL-
4142E, 2010, available at http://certs.lbl.gov/pdf/lbnl-4142e.pdf).
---------------------------------------------------------------------------

    47. Certain commenters \73\ argue that the integration of 
additional faster-responding resources into the mix of frequency 
regulation resources will result in environmental benefits. For 
example, Beacon, CESA, and ESA cite to a 2007 KEMA and an October 2008 
Carnegie Mellon University study in support. The KEMA study 
demonstrated that continued reliance on thermal generating units to 
meet increased regulation requirements could actually increase 
emissions of carbon dioxide (CO2), nitrogen oxides 
(NOX) and other pollutants, thereby defeating one of the 
main benefits of wind generation.\74\ The Carnegie Mellon University 
study estimated that 20 percent of the CO2 emission 
reduction and up 100 percent of the NOX emission reduction 
expected from introducing wind and solar power will be lost because of 
the extra ramping requirements they impose on traditional 
generation.\75\ Finally, CPUC states that while the Commission's 
proposal is resource-neutral, it provides an economic incentive for 
resources to assist in reducing greenhouse gas emissions, compensate 
for variability of intermittent resources, and reduce costs to 
consumers through decreased regulation procurement requirements.\76\
---------------------------------------------------------------------------

    \73\ See e.g., EDF May 2, 2011 Comments at P10.
    \74\ Beacon May 2, 2011 Comments at 13, CESA May 2, 2011 
Comments at 5, and ESA May 2, 2011 Comments at 12-13 (citing KEMA, 
Emissions Comparison for a 20MW Flywheel-based Frequency Regulation 
Power Plant, May 18, 2007).
    \75\ Beacon May 2, 2011 Comments at 13, ESA May 2, 2011 Comments 
at 13 (citing Katzenstein, W., and Jay Apt. Air Emissions Due To 
Wind and Solar Power. Environmental Science & Technology. 2009, 43, 
253-258. (available at http://pubs.acs.org/doi/pdf/10.1021/es801437t)).
    \76\ CPUC May 2, 2011 Comments at 2-3.
---------------------------------------------------------------------------

    48. Other commenters offer cautious support. For example, while 
Duke Energy concurs that the faster-ramping resource should be 
compensated for the actual amount of work that it performs, it cautions 
that faster-ramping resources may not always be needed, and that 
micromanaging power swings with faster resources may even result in 
over-control of the system.\77\
---------------------------------------------------------------------------

    \77\ Duke May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    49. Some commenters argue that the Commission has not justified the 
increased costs that its compensation proposal may impose on load 
serving entities and other network integration transmission service 
customers.\78\ Others state that the Commission failed to consider the 
impact on customers, who EEI states will ultimately bear the greatest 
share of costs, by balancing increased payments to faster ramping 
resources with savings through reduced regulation procurement or lower 
payments to slower resources. As a result, EEI argues, load will likely 
pay more for regulation service without any demonstrated reliability 
benefit or decrease in the need for other resources.\79\ NY TOs, for 
example, request that the Commission require NYISO to estimate the net 
savings to consumers that would result if offering incentives for 
increased participation by dedicated frequency regulation resources 
induces more traditional capacity to shift away from the regulation 
market and into the energy market.\80\ NaturEner requests that the 
Commission be vigilant against possible unintended consequences, such 
as increasing frequency regulation cost or requiring a greater volume 
of frequency regulation resources.
---------------------------------------------------------------------------

    \78\ EEI May 2, 2011 Comments at 12, TAPS May 2, 2011 Comments 
at 4-5; Invenergy May 2, 2011 Comments at 2-3.
    \79\ EEI May 2, 2011 Comments at 12.
    \80\ NY TOs May 2, 2011 Comments at 5.
---------------------------------------------------------------------------

    50. Invenergy cautions the Commission to evaluate whether 
alternative compensation structures, in addition to being higher cost, 
will also result in better quality regulation, lower quantities of 
regulation, and improved reliability.\81\
---------------------------------------------------------------------------

    \81\ Invenergy May 2, 2011 Comments at 2-3.
---------------------------------------------------------------------------

    51. EPSA states that while it supports RTOs and ISOs employing a 
mileage component similar to that employed in the ISO-NE regulation 
market, that measure should be used to meet the objectives of 
regulation service and not require incremental performance levels, 
which do not yield incremental benefits.\82\ EPSA states that adequate 
frequency is being achieved currently under NERC ACE control standards 
through reliability requirement CPS1 by each of the RTO and ISO 
balancing authorities. Thus, EPSA encourages the Commission to 
recognize that payment for enhanced performance should only be made if 
there is a material need for that performance.\83\ Duke agrees, stating 
that no study has been conducted that indicates faster response is 
necessary for reliable system operations.\84\ While CAISO notes that it 
is considering development of a performance payment for regulation 
service, it cautions the Commission against requiring a specific 
performance payment absent a conclusion that faster-ramping resources 
are required in all markets.\85\
---------------------------------------------------------------------------

    \82\ EPSA May 2, 2011 Comments at 7.
    \83\ Id. at 6.
    \84\ Duke May 2, 2011 Comments at 2.
    \85\ CAISO May 2, 2011 Comments at 11-12.
---------------------------------------------------------------------------

    52. Jack Ellis contends that the Commission's proposal to require a 
payment for performance has several flaws that cannot be easily 
corrected.\86\ He argues that the first flaw is that the rate is likely 
to be administratively-determined. Mr. Ellis contends that there is no 
straightforward way for both the mileage payment and the capacity 
payment to be established through competitive offers. Therefore, he 
argues, the subjective judgment of the Commission and the operators of 
RTOs and ISOs will replace market forces in determining the value of 
frequency regulation service. Second, Mr. Ellis argues that because the 
rate will be administratively-determined, it will be controversial and 
subject to litigation. Third, Mr. Ellis contends that the performance 
payment will increase payments that must be recovered through uplift, 
complicating existing settlement procedures and efforts to reduce 
uplift. Fourth, Mr. Ellis argues that a performance payment will unduly 
discriminate against existing technologies that could respond faster 
but for the presence of barriers that have not, to date, presented 
themselves as obstacles. He explains that these barriers include the 
use of static ramp rates that reflect typical performance under all 
conditions rather than peak performance under conditions that exist at 
a point in time. Finally, Mr. Ellis contends that multi-part offers 
require complex rules to deter market manipulation because it is 
difficult to differentiate between legitimate and illegitimate bidding 
behavior.\87\ Mr. Ellis asserts that it is neither reasonable nor cost-
effective to pay a premium for faster ramping capability in situations 
where adequate ramping capability is available to meet the grid 
operator's needs.\88\
---------------------------------------------------------------------------

    \86\ Jack Ellis April 12, 2011 Comments at 2.
    \87\ Jack Ellis April 12, 2011 Comments at 2-3.
    \88\ Id. at 3.
---------------------------------------------------------------------------

    53. TAPS recommends that the Commission direct each of the affected 
regions to evaluate its own frequency regulation market rules, and 
change them only if they make a regionally-

[[Page 67267]]

specific showing that the changes will increase consumer welfare.\89\
---------------------------------------------------------------------------

    \89\ TAPS May 2, 2011 Comments at 2-3.
---------------------------------------------------------------------------

    54. Some commenters dispute the position that the integration of 
more faster-responding resources for frequency regulation service will 
result in lower costs to consumers. Jack Ellis argues that, while it is 
possible that RTOs and ISOs could reduce the short-term cost of serving 
load by procuring less regulation, long-term costs would likely 
increase as supply resources that are pushed out of the frequency 
regulation market demand higher prices in other joint product markets 
such as capacity, energy, and other ancillary services markets. Mr. 
Ellis argues that this will happen because these resources will be 
losing revenue and will make up for that lost revenue by bidding in at 
higher levels in these other markets.\90\ Mr. Ellis concedes that long-
term savings could accrue, but only if resource adequacy requirements 
also decrease by an equal or greater amount or if the integration of 
more faster-responding resources allows a reduction in the amount of 
incremental resources that must be procured to deal with increases in 
variable generation.\91\
---------------------------------------------------------------------------

    \90\ Jack Ellis April 12, 2011 Comments at 6 (emphasis in 
original).
    \91\ Id. at 7.
---------------------------------------------------------------------------

    55. The NY PSC recognizes the potential benefits of the NOPR 
proposal, but it is uncertain what the cost and benefits of any 
proposed changes to the compensation mechanism would be within the 
NYISO.\92\ Finally, PG&E argues that while the benefits expected by 
others might be seen, a cost-benefit analysis is appropriate.\93\
---------------------------------------------------------------------------

    \92\ NY PSC May 2, 2011 Comments at 3.
    \93\ PG&E May 2, 2011 Comments at 8.
---------------------------------------------------------------------------

    56. EEI, NY TOs, TAPS and Invenergy also express concern that the 
NOPR proposal will result in increased costs to load. EEI argues that 
load will likely pay more for regulation service without any 
demonstrated reliability benefit or decrease in the need for other 
resources. NY TOs requests that the Commission require NYISO to 
estimate the net savings that would result if the NOPR's compensation 
mechanism causes more traditional capacity to shift away from the 
frequency regulation market and into the energy market.
    57. CAISO states that while it has conducted studies that indicate 
a preliminary need for additional ramping capability, the full scope of 
its intended studies is not complete and the benefits have not been 
quantified. CAISO claims that studies conducted to identify system 
needs under a 20 percent renewable portfolio standard indicate a 
potential need for dispatchable down ramping capability. However, CAISO 
argues that studies for a 33 percent Renewable Portfolio Standard are 
still ongoing, and that the Commission should not impose a specific 
compensation model for regulation resources without quantifying the 
needs and benefits of such a model.\94\
---------------------------------------------------------------------------

    \94\ CAISO May 2, 2011 Comments at 14-16.
---------------------------------------------------------------------------

    58. EPSA asserts that the argument that slow resources work against 
the system operator assumes a regulation performance standard that 
exceeds existing requirements. EPSA states that RTOs and ISOs are 
currently required to maintain ACE within acceptable limits over a ten-
minute period, consistent with NERC standards (CPS1 and CPS2). Because 
AGC signals are sent on a four-second cycle, the benefits of fast-
ramping resources that are realized within that cycle, such as 
increased ramping mileage, may not materially improve the operator's 
ability to regulate ACE on a ten-minute basis. EPSA argues that RTOs 
and ISOs already design and adjust regulation software to account for 
differing characteristics of regulation resources, and requiring 
increased payments is therefore unnecessary.\95\
---------------------------------------------------------------------------

    \95\ EPSA May 2, 2011 Comments at 7-9.
---------------------------------------------------------------------------

    59. While MISO states that it supports a mileage payment that 
compensates regulating resources for the wear and tear associated with 
performance, it also contends that there is presently no benefit to 
consumers within the MISO system that would justify payment for the 
provision of down regulation in addition to the capacity payment such 
market participants already receive. MISO recommends that the 
Commission continue to allow RTOs and ISOs to address whether netting 
or some other mechanism is appropriate to compensate regulating 
resources.\96\
---------------------------------------------------------------------------

    \96\ MISO May 2, 2011 Comments at 6.
---------------------------------------------------------------------------

c. Standardization of Market Rules
    60. Several entities further oppose a uniform approach, arguing 
that existing market rules are different in the various RTOs and ISOs 
and disparate resources available in those markets creates a preference 
for a regional approach.\97\ While PJM and some other RTOs support the 
goal of the proposed regulation, stating that it will result in more 
efficient price signals and more accurate payment for the provision of 
frequency regulation service, a subset of the RTOs and ISOs seek 
flexibility to, for example in the case of ISO-NE, allow compensation 
for performance using the ``mileage'' paradigm that has been used since 
2003.\98\ CAISO contends that there is not a single approach to 
incentivize resources to provide faster-ramping service, nor a single 
compensation scheme that fits all markets. Instead, CAISO recommends 
that the Commission direct RTOs and ISOs to examine through their 
stakeholder processes potential payment mechanisms that will address 
the Commission's concerns.\99\ MISO adds that if the Commission 
determines in this Final Rule that compensation of frequency regulation 
providers requires further examination, the Commission should allow 
each RTO and ISO to develop the compensation mechanisms that are best 
for its region.\100\ Duke and the NY PSC argue that every RTO and ISO 
has different operations and market mechanisms, and each RTO and ISO 
should determine fair and just compensation methodologies for frequency 
regulation resources, including faster ramping ones, that are 
specifically tailored for their market.\101\
---------------------------------------------------------------------------

    \97\ Detroit Edison May 2, 2011 Comments at 2-4. Duke May 2, 
2011 Comments at 203. EEI May 2, 2011 Comments at 13-14, IRC May 2, 
2011 Comments at 8, MISO TOs May 2, 2011 Comments at 5-7, NYISO May 
2, 2011 Comments at 5-6, PG&E May 2, 2011 Comments at 3-4, SCE May 
2, 2011 Comments at 2, TAPS May 2, 2011 Comments at 4-5.
    \98\ ISO-NE May 2, 2011 Comments at 6. See also, NECPUC May 2, 
2011 Comments at 4, NEPOOL May 2, 2011 Comments at 8-9.
    \99\ CAISO May 2, 2011 Comments at 2.
    \100\ MISO May 2, 2011 Comments at 7.
    \101\ Duke Energy May 2, 2011 Comments at 2, NYPSC May 2, 2011 
Comments at 4.
---------------------------------------------------------------------------

    61. Dominion recommends that, instead of standardizing compensation 
for frequency regulation, the Commission should direct the RTOs and 
ISOs to revise their frequency regulation markets so that they 
appropriately value faster-ramping resources. Dominion states that each 
region operates differently and that each RTO or ISO and its 
stakeholders are in the best position to develop changes to the 
compensation mechanism.\102\
---------------------------------------------------------------------------

    \102\ Dominion May 2, 2011 Comments at 3-4.
---------------------------------------------------------------------------

    62. PG&E argues that accuracy payments alone (without any up and 
down mileage component) could be equally effective in addressing the 
Commission's NOPR objectives, or alternatively, there may be entirely 
different approaches such as new regulation ramp-rate constraints and 
market components.\103\
---------------------------------------------------------------------------

    \103\ PG&E May 2, 2011 Comments at 8-9.
---------------------------------------------------------------------------

    63. Starwood/Premium supports the Commission's proposal for a 
performance payment and recommends that the Commission require that all 
RTOs and ISOs have standardized tariff provisions for the compensation 
of frequency regulation resources. They argue that a lack of 
standardization

[[Page 67268]]

leads to inefficient long-term investment and makes it more difficult 
for potential market entrants to analyze the economic viability of 
entering one market or another.\104\ Xtreme Power seeks prompt 
implementation of the NOPR's proposed reforms, recommending that the 
Commission establish an expedited timeline for RTOs and ISOs to comply 
with the Final Rule.\105\
---------------------------------------------------------------------------

    \104\ Starwood/Premium May 2, 2011 Comments at 3.
    \105\ Xtreme Power May 2, 2011 Comments at 8.
---------------------------------------------------------------------------

3. Commission Determination
a. Unduly Discriminatory Pricing
    64. After developing and reviewing an extensive record in this 
proceeding compiled through a technical conference in which 11 experts 
in the field participated and issuance of a NOPR, and consideration of 
responsive pleadings submitted by 53 commenters, the Commission finds, 
pursuant to FPA section 206, that existing market rules for the 
compensation of frequency regulation resources are unjust and 
unreasonable, and unduly discriminatory or preferential. Current rules 
in the RTO and ISO tariffs which govern pricing and compensation for 
frequency regulation services in the RTO and ISO markets are unduly 
discriminatory, because resources are compensated at the same level 
even when providing different amounts of frequency regulation service; 
existing frequency regulation compensation methods fail to compensate 
certain resources for all of the service they provide, even when the 
system operator directs them to provide more frequency regulation 
service than other resources.
    65. Beacon, Primus Power, and others argue and present evidence 
showing that current market rules allow for unduly discriminatory 
compensation among frequency regulation resources. Beacon provides data 
from its operations in ISO-NE \106\ and NYISO \107\ showing that two 
resources being asked to provide different amounts of frequency 
regulation service in real-time can be compensated at the same level. 
Beacon shows that it is even possible for the resource asked to provide 
more service to be paid less. Primus Power also provides evidence that 
resources that have different ramping capabilities can perform 
different amounts of work.\108\ Given current market rules these 
resources would not be compensated in a way that reflects the different 
amount of work they have performed. Support for this proposal also 
comes from the RTOs and ISOs. PJM states that a performance payment 
provides an appropriate incentive to provide high quality regulation 
service by tying a portion of the total compensation to a resource's 
performance. In addition, PJM asserts that a performance payment will 
ensure resources provide accurate responses to control signals, in 
contrast with the current structure that provides no incentive to 
perform above a minimum threshold. We are convinced by the evidence 
presented by commenters that current market designs can result in rates 
that are unduly discriminatory and unjust and unreasonable.
---------------------------------------------------------------------------

    \106\ Beacon May 2, 2011 Comments at 6-7.
    \107\ Id. at 22-24.
    \108\ Primus Power April 18, 2011 Comments at 5.
---------------------------------------------------------------------------

    66. As such, compensating resources for their capacity without 
compensating for the different amounts of frequency regulation service 
different resources provide fails to compensate for the additional work 
performed by the resources. Thus, contrary to CAISO's position that its 
market rules are not unduly discriminatory or preferential because they 
allow a faster-ramping resources to offer a relatively greater amount 
of capacity into the regulation market than a slower ramping resources 
with the same capability, we find that this fails to differentiate 
between the different amounts of frequency regulation service different 
resources provide, and therefore fails to compensate for the additional 
work one resource may be asked to do by the system operator compared to 
another resource. In this respect, CAISO's market design is no 
different from other RTOs and ISOs in that it compensates frequency 
regulation resources in a manner we find to be unduly 
discriminatory.\109\
---------------------------------------------------------------------------

    \109\ This is irrespective of whether the energy management 
system includes a priority dispatch for resources with faster-
ramping capability or the system dispatcher sends control signals to 
the resource.
---------------------------------------------------------------------------

    67. Where the Commission finds an existing rate to be unjust, 
unreasonable, unduly discriminatory, or preferential, the Commission 
has a statutory mandate to set the just and reasonable rate.\110\ The 
Commission agrees with commenters who argue that current methods used 
by RTOs and ISOs to compensate frequency regulation providers that fail 
to account for the actual service provided by resources are unduly 
discriminatory and that a resource's performance in following the AGC 
signal of the RTO or ISO should be taken into consideration when 
compensating that resource for providing frequency regulation service. 
We find that including a performance payment system will ensure just 
and reasonable rates, based on the actual service provided at costs 
established by competitive processes, and resulting in efficient price 
signals and appropriately compensating resources that are asked to do 
more work. \111\
---------------------------------------------------------------------------

    \110\ 16 U.S.C. 824e.
    \111\ See Promoting Wholesale Competition Through Open Access 
Non-Discriminatory Transmission Services by Public Utilities; 
Recovery of Stranded Costs by Public Utilities and Transmitting 
Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & 
Regs. ] 31,036 at 31,684 (1996), order on reh'g, Order No. 888-A, 62 
FR 12274 (Mar. 14, 1997), FERC Stats. & Regs. ] 31,048, order on 
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, 
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub 
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 
(DC Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002). 
(``In the context of an emerging competitive market in generation, 
discriminatory practices that once did not constitute undue 
discrimination must be reviewed to determine whether they are being 
used to prevent the benefits of competition in generation from being 
achieved.'').
---------------------------------------------------------------------------

b. Potential Market Benefits
    68. The Commission's setting of a just and reasonable rate here is 
further supported by the many comments received in response to the 
NOPR's contention that faster responding resources have the potential 
to improve the operational and economic efficiency of the frequency 
regulation market. Commenters point to the more efficient utilization 
of all resources capable of providing frequency regulation when the 
payment to resources is structured to justly compensate resources for 
the work performed, thus freeing other resources to perform services 
more in line with their operational characteristics and increasing the 
efficiency of doing so. We find these comments persuasive. A123, 
Beacon, PNNL, CESA and ESA provide evidence demonstrating that faster-
responding resources have the potential to lower frequency regulation 
capacity requirements, thereby improving market efficiencies. Further, 
experience in the organized markets that already have higher 
concentrations of faster-responding resources shows that less frequency 
regulation capacity procurement is required due to the availability of 
faster-responding resources to provide that capacity.\112\
---------------------------------------------------------------------------

    \112\ Beacon May 2, 2011 Comments at 9-10, ESA May 2, 2011 
Comments at 9-10, EDF May 2, 2011 Comments at P 8.
---------------------------------------------------------------------------

    69. We are not persuaded by commenters, like EEI, that argue that 
the Commission should encourage pilot programs to measure reliability 
benefits before adopting the NOPR proposal. First, we note that ISO-NE 
has carried out just such a pilot program.\113\

[[Page 67269]]

Second, the Commission has determined that it must act to remedy undue 
discrimination in the current compensation for frequency regulation; 
the Commission is ensuring just and reasonable rates and protecting 
against undue discrimination among resources in doing so. It is 
irrelevant to this finding that the RTOs and ISOs currently comply with 
the relevant NERC standards, as argued by EPSA. EPSA's argument does 
not take away from the unduly discriminatory way in which the RTOs and 
ISOs compensate the resources that they procure in order to meet the 
NERC reliability standards. The reforms required here are necessary to 
remedy unduly discriminatory rates, but they will also enable greater 
competition in the organized markets and allow existing generation to 
provide more capacity in the energy markets and to run closer to their 
optimal output levels.
---------------------------------------------------------------------------

    \113\ See ISO-NE, Market Rule 1, Appendix J, Alternative 
Technologies Regulation Pilot Program, available at http://www.iso-ne.com/regulatory/tariff/sect_3/mr1_append-j.pdf. The most recent 
informational filing from ISO-NE describing this program can be 
found at http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=12768589 (Sept. 19, 2011).
---------------------------------------------------------------------------

    70. Contrary to EEI's arguments, the justness and reasonableness of 
the compensation mechanism directed here does not hinge on a finding 
that it will improve reliability. It is important to note, however, as 
discussed in the comments submitted by PJM, a resource's ability to 
quickly and accurately follow dispatch instructions will allow the 
system operator to better maintain system balance.\114\
---------------------------------------------------------------------------

    \114\ PJM May 2, 2011 Comments at 3-4.
---------------------------------------------------------------------------

    71. We also disagree with the contention that, while short-run 
costs might decrease, long-run costs will increase due to displaced 
frequency regulation resources demanding higher prices in the energy 
market to make up for their lost frequency regulation revenue. There is 
no reason to believe that energy costs would increase when the supply 
of available energy capacity increases. If markets currently clear with 
a sufficient level of capacity, adding new capacity at a higher cost 
would not change that and would not lead to higher market-clearing 
prices in the energy market. Any market participant that chooses to 
raise its offer price runs the risk of its capacity not clearing in the 
energy market. And because energy resources would be able to operate at 
more efficient heat rates, they would be able to offer their capacity 
into the energy markets at a lower price.
    72. We find persuasive the arguments made by commenters that we can 
expect to see market efficiency gains and reduced costs to consumers. 
For example, Beacon, ESA, Alcoa, Primus Power, and other commenters 
argue convincingly that sending efficient price signals will remove 
barriers to the entry of faster-ramping and more accurate frequency 
regulation resources. This in turn should lead to reductions in the 
amount of frequency regulation capacity that each balancing area 
authority needs to procure in order to maintain reliability. As the 
needed quantity of frequency regulation decreases, the net result 
should be a reduction in expenditures on frequency regulation, and 
ultimately a lower cost for electricity for consumers.\115\ Commenters 
cite studies from PNNL, the California Energy Commission, and PJM, and 
data from ISO-NE and NYISO, that support this conclusion. PNNL showed 
that faster-ramping frequency regulation resources could be as much as 
17 times more effective than conventional ramp-limited regulation 
resources \116\ and the California Energy Commission found that storage 
resources can be up to two to three times as effective as adding a 
combustion turbine to the system for regulation purposes.\117\ In 
addition, Xtreme Power notes that many newer technologies can operate 
in the frequency regulation market at lower costs than other, older 
technologies.\118\ Therefore, we expect lower costs for consumers will 
result because less total capacity must be procured and because the 
capacity that is procured will be from lower-cost resources entering 
the market. Further, we share the view that the displacement of 
existing resources may result in those resources being able to more 
efficiently operate in the energy markets, submitting lower offers to 
supply energy, and thereby lowering costs to consumers in that market. 
Further, in the long-run, efficient price signals will also incent the 
efficient mix of resources to enter the market, thereby leading to 
lower long-run costs to consumers. We note that many commenters also 
cite potential reliability \119\ and environmental \120\ benefits that 
could be seen from the use of faster-ramping resources. Thus, we find 
that the changes mandated by this Final Rule will not only remedy the 
undue discrimination existing in current market designs, but have the 
potential to result in lower costs to consumers.
---------------------------------------------------------------------------

    \115\ Primus Power May 2, 2011 Comments at 7.
    \116\ Makarov, Y.V., Ma, J., Lu, S., Nguyen, T.B., ``Assessing 
the value of Regulation Resources Based on Their Time Response 
Characteristics,'' Pacific Northwest National Laboratory, PNNL--
17632, June 2008.
    \117\ Beacon May 2, 2011 Comments at 8-9 (citing KEMA, 
``Research Evaluation of Wind Generation, Solar Generation, and 
Storage Impact on the California Grid'' (prepared for the California 
Energy Commission), June, 2010).
    \118\ Xtreme Power May 2, 2011 Comments at 5.
    \119\ See generally A123, Alcoa, Beacon, CESA, ESA, PIOs, and 
PJM.
    \120\ See generally Beacon, CESA, CPUC, ESA, and EDF.
---------------------------------------------------------------------------

    73. While Duke argues that faster-ramping resources may not always 
be needed to ensure the reliability of the system, and that the markets 
are currently operating without performance payments, the Commission 
finds that adding a performance payment to the compensation system will 
remedy undue discrimination and improve the efficiencies in the market 
and allow resources to provide those services that best suit them. 
Resources, no matter their type, will only receive the performance 
payment when they are actually called on to provide frequency 
regulation service, and they do so accurately. We also reject MISO's 
recommendation that we allow RTOs and ISOs to continue to only net 
energy balances and provide a capacity payment as compensation for 
frequency regulation service. As we state above, doing so can result in 
unduly discriminatory treatment of frequency regulation resources.
    74. MISO's claim that its customers derive no benefit from down 
regulation is based on the presumption that MISO never directs any 
regulation resources to provide frequency regulation in that direction. 
Even if this is true, and MISO provided no data showing that it is, it 
does not change the fact that relying only on the capacity payment and 
net energy balancing results in discriminatory compensation when one 
resource is asked to provide more movement than others, a situation 
that can occur even if MISO only ever directs its resources to provide 
up regulation. Accordingly, as discussed further in the compliance 
section below, we will require the ISOs and RTOs to include a 
performance payment in their frequency regulation pricing mechanism.
c. Standardization of Market Rules
    75. In response to certain commenters express concerns with 
requiring a uniform approach to compensation for frequency regulation, 
as described below, we will allow the RTOs and ISOs flexibility to 
design market rules that accommodate their markets, while at the same 
time addressing existing unduly discriminatory rates. In response to 
Starwood/Premium, it is not practical for the Commission to mandate 
that all RTOs and ISOs have identical provisions in their tariffs for 
the

[[Page 67270]]

compensation of frequency regulation resources. First, the RTOs and 
ISOs do not now have identical provisions for other market operations; 
mandating identical provisions in this regard could require completely 
overhauling all RTO and ISO tariffs. Second, identical tariff 
provisions are not necessary so long as all tariffs provide for just 
and reasonable and not unduly discriminatory or preferential rates.
    76. PG&E suggests that an accuracy component alone could suffice to 
remedy undue discrimination in the compensation of frequency regulation 
resources. While this would account for the difference in the accuracy 
of resources, it would fail to acknowledge the different levels of work 
requested of each. Further, the Final Rule does not create a special 
class of resource or otherwise compensate any one type of resource to 
the exclusion of others. This Final Rule is resource-neutral, requiring 
that compensation reflect the frequency regulation service provided, no 
matter the resource.
    77. Thus, we will require certain things of all RTOs and ISOs: to 
institute a two-part payment for frequency regulation and to account 
for a resource's accuracy in its compensation. However, as described 
below, in many instances we will leave to the individual RTOs and ISOs 
how best to meet these requirements.

B. Specific Proposals

    78. The NOPR set forth a frequency regulation compensation 
mechanism for the RTO and ISO markets to ensure that pricing and 
compensation of frequency regulation service is just and reasonable and 
not unduly discriminatory or preferential. Specifically, the Commission 
proposed to require RTOs and ISOs to change their tariffs so that 
regulation resources receive a two-part payment. The first part of the 
payment is a capacity, or option, payment to have a certain amount of 
capacity held in reserve and not participate in the energy market in 
order to provide frequency regulation service. To produce the efficient 
market outcome, this proposed payment includes the marginal regulating 
resource's opportunity costs. The NOPR also set forth a second payment 
based on performance, as measured by the amount of MWh up and down 
movement the resource provides in response to the system operator's 
dispatch signal.\121\ This performance payment takes into consideration 
a resource's accuracy in responding to that signal. The Commission 
preliminarily found that this compensation structure is necessary to 
ensure that pricing schemes for frequency regulation service in the 
organized wholesale electricity markets result in rates that are just 
and reasonable, and not unduly discriminatory or preferential.
---------------------------------------------------------------------------

    \121\ This applies whether an RTO or ISO allows resources to 
sell regulation up and regulation down separately or requires 
resources to offer both regulation up and down as one product.
---------------------------------------------------------------------------

1. Capacity Payment and Opportunity Cost
a. NOPR Proposal
    79. The Commission proposed to require that each regulating 
resource be paid a uniform capacity payment that includes the 
opportunity cost of the marginal regulating resource. As discussed 
above, some RTOs and ISOs currently pay resource-specific opportunity 
costs or make-whole payments in addition to a capacity payment, while 
others incorporate the marginal unit's opportunity cost into a uniform 
regulation market clearing capacity price. In order to send an 
efficient price signal to frequency regulation resources, the 
Commission proposed that RTOs and ISOs base the clearing price for 
frequency regulation on the marginal resource's costs, including 
opportunity cost. The NOPR explained that paying a unit-specific 
opportunity cost distorts the market by basing the commitment of 
regulating units on incomplete market information, potentially leading 
to committing units with higher costs than other units not committed. 
This problem is especially glaring in a market such as this where some 
resources have no opportunity costs, resulting in disparate payments to 
resources.\122\ Accordingly, the Commission preliminarily found that a 
frequency regulation compensation mechanism that includes a uniform 
clearing price with accurately determined opportunity costs will reduce 
errors in selecting the optimal portfolio of regulation suppliers each 
hour (and each day), which reduces total regulation costs to consumers 
and ensures that rates are just and reasonable and not unduly 
discriminatory or preferential.
---------------------------------------------------------------------------

    \122\ For example, a storage resource that is only allowed to 
participate in the frequency regulation market has no opportunity 
costs related to the energy market, unlike a traditional generator. 
Therefore, the storage resource's capacity payment could be lower 
than the generator's capacity payment. These payments send 
inefficient signals to market participants.
---------------------------------------------------------------------------

    80. In addition, the Commission preliminarily found that cross-
product opportunity costs \123\ should be calculated by the RTO or ISO, 
as it has the best information to determine a frequency regulation 
resource's opportunity cost due to not participating in the energy 
market. Further, the Commission proposed that, where appropriate, 
resources should be permitted to include inter-temporal opportunity 
costs in their capacity bid.\124\ The Commission sought comment on its 
proposal to require each regulating resource to be paid a uniform 
capacity payment that includes the opportunity cost of the marginal 
regulating resource.
---------------------------------------------------------------------------

    \123\ A cross-product opportunity cost, in this case, is the 
revenue a regulation provider loses because it is on stand-by to 
provide regulation and is not providing energy or another product.
    \124\ An inter-temporal opportunity cost represents the foregone 
value when a resource must operate at one time, and therefore must 
either forego a profit from selling energy at a later time or incur 
costs due to consuming at a later time. The trade-off presented to 
thermal storage provides an example of inter-temporal opportunity 
costs. A thermal storage operator would prefer to ``charge'' (heat 
bricks or freeze water) when prices are low. If such a resource were 
to provide frequency regulation, it could be asked to stop charging 
during low price periods and then be forced to charge during high 
price periods.
---------------------------------------------------------------------------

b. Comments
i. The Capacity Payment
    81. A number of commenters support the Commission's capacity 
payment proposal.\125\ They agree that this proposal will result in a 
price signal that will more efficiently select the portfolio of 
resources between the energy and regulation markets.\126\ OMS states 
that it believes that when a consistent definition of opportunity cost 
is used and reflected in the market price, the optimal solution for 
commitment and dispatching across energy and reserves is 
accomplished.\127\ Xtreme Power states that it supports the NOPR's 
proposal because a uniform capacity payment will help entice new entry 
into the frequency regulation market, thereby enhancing competition, 
whereas unit-

[[Page 67271]]

specific capacity costs, paid on a unit-specific basis, will distort 
the market.\128\
---------------------------------------------------------------------------

    \125\ Alcoa May 2, 2011 Comments at 3, Beacon May 2, 2011 
Comments at 15-16, CESA May 2, 2011 Comments at 2, Dominion May 2, 
2011 Comments at 4, Duke May 2, 2011 Comments at 6, EDF May 2, 2011 
Comments at 5, ELCON May 2, 2011 Comments at 2-4, EPSA May 2, 2011 
Comments at 5, ENBALA May 2, 2011 Comments at 8, ESA May 2, 2011 
Comments at 16-18, IRC May 2, 2011 Comments at 7, ISO-NE May 2, 2011 
Comments at 2 and 13, NEPOOL May 2, 2011 Comments at 7-8, NYISO May 
2, 2011 Comments at 2, OMS May 2, 2011 Comments at 4, PG&E May 2, 
2011 Comments at 7, PJM May 2, 2011 Comments at 5, Powerex May 2, 
2011 Comments at 4, Primus Power May 2, 2011 Comments at 6, SoCal 
Edison May 2, 2011 Comments at 4, VCharge April 27, 2011 Comments at 
2, and Xtreme Power May 2, 2011 Comments at 6.
    \126\ Dominion May 2, 2011 Comments at 4, ELCON May 2, 2011 
Comments at 2-3,
    \127\ OMS May 2, 2011 Comments at 4.
    \128\ Xtreme Power May 2, 2011 Comments at 6.
---------------------------------------------------------------------------

    82. Beacon, CESA, EDF, PG&E, Powerex, ENBALA, and ESA \129\ agree 
that the capacity payment should be based on the marginal unit's costs, 
including its opportunity cost, in part because, as some parties note, 
a large part of a traditional resource's cost to provide frequency 
regulation is the lost opportunity cost associated with not providing 
energy. Several parties also note that RTOs and ISOs that pay unit-
specific opportunity costs send a distorted market signal, possibly 
resulting in a higher cost resource being selected to provide service 
in lieu of a lower-cost resource. These commenters assert that a 
uniform capacity payment that includes opportunity cost will send the 
strongest price signal to low cost resources, and that the grid should 
experience a reduction in the overall market costs as low cost 
providers are encouraged to enter the market.\130\ Specifically, Beacon 
states that such a payment will remove an economic barrier to entry of 
new alternative regulation technologies by ensuring that the capacity 
payment reflects the full value of that service.\131\
---------------------------------------------------------------------------

    \129\ EDF May 2, 2011 Comments at P 12-13 (citing Beacon Power 
June 25, 2010 Comments on May 26, 2010 Technical Conference (Docket 
No. AD10-11-000) at 44-45), PG&E May 2, 2011 Comments at 7, Powerex 
May 2, 2011 Comments at 4, Primus Power April 18, 2011 Comments at 
6.
    \130\ Beacon May 2, 2011 Comments at 16, CESA May 2, 2011 
Comments at 7, ESA May 2, 2011 Comments at 16, EDF May 2, 2011 
Comments at P 12-13.
    \131\ Beacon May 2, 2011 Comments at 18.
---------------------------------------------------------------------------

    83. EPSA agrees that the most efficient dispatch and fairest 
regulation market design is one in which all resources compete on the 
same basis for the same price. EPSA states that the regulation market 
should consider each resource's as-bid cost plus any opportunity cost, 
such that the marginal as-bid plus opportunity cost of the resources 
selected should set a uniform clearing price paid to all. It argues 
that a uniform market clearing price will ensure consideration of all 
appropriate marginal costs for all regulation market participants and 
will result in price signals that will properly incent efficient future 
infrastructure investment.\132\
---------------------------------------------------------------------------

    \132\ EPSA May 2, 2011 Comments at 5.
---------------------------------------------------------------------------

    84. ENBALA notes that individual side payments made to resources 
are generally confidential and hidden in a broader declaration of total 
payments, only adding complexity and inefficiency to the markets. On 
the other hand, it states that an optimized total cost solution that 
calculates a uniform price utilizing opportunity costs provides 
transparency and clarity.\133\
---------------------------------------------------------------------------

    \133\ ENBALA May 3, 2011 Comments at 8.
---------------------------------------------------------------------------

    85. PIOs state that not including opportunity costs in a uniform 
clearing price discriminates against newer resources with lower 
opportunity costs that, in a full marginal clearing price auction, 
would generally be more economic than traditional generators with 
higher opportunity costs stemming from operating at less than maximum 
capacity.\134\ PIOs state that the proposed method would ensure that 
the market-clearing capacity price would reflect the total marginal 
costs of the last cleared unit, thereby eliminating the unlevel playing 
field that out-of-market opportunity cost payments currently 
impart.\135\
---------------------------------------------------------------------------

    \134\ PIOs May 2, 2011 Comments at P 7.
    \135\ Id. P 12.
---------------------------------------------------------------------------

    86. Beacon, CESA, and ESA note that PJM has recently filed with the 
Commission tariff revisions that will alter how it calculates 
opportunity costs for regulation capacity. In it's filing, PJM states 
that these revisions ``[h]elp to reduce after-the-fact, non-market 
changes to Regulation resource compensation, and enhance price signals 
that will better enable new, innovative resources and technologies to 
meet the system's Regulation needs * * *.'' \136\ Beacon and CESA also 
contend that PJM has acknowledged that the value of frequency 
regulation capacity has been upwards of 33 percent higher than is 
reflected in market clearing prices,\137\ a statement they assert is 
supported by PJM's market monitor.\138\
---------------------------------------------------------------------------

    \136\ Beacon May 2, 2011 Comments at 17, CESA May 2, 2011 
Comments at 7, ESA May 2, 2011 Comments at 16-17 (citing PJM's 
Proposed Package of Reforms to Establish Just and Reasonable Pricing 
for Operative Reserve Shortages in the PJM Region (Docket No. ER09-
1063-004) at 3).
    \137\ Beacon May 2, 2011 Comments at 18 (citing Monitoring 
Analytics, LLC. ``2010 State of the Market Report for PJM.'' March 
10, 2011).
    \138\ Beacon May 2, 2011 Comments at 18-19, ESA May 2, 2011 
Comments at 17-18 (citing Monitoring Analytics, LLC. ``2010 State of 
the Market Report for PJM.'' March 10, 2011).
---------------------------------------------------------------------------

    87. EPSA argues that ISO-NE pays unit-specific opportunity costs, 
which, according to EPSA, risks understating the regulation clearing 
price where a unit with an opportunity cost is the marginal 
resource.\139\ Beacon, CESA, and ESA also note that at the technical 
conference, ISO-NE stated that it is moving in the direction of paying 
a uniform clearing price.\140\ Beacon, ESA, CESA, and NEPOOL state that 
at the November 2010 NEPOOL Markets Committee meeting ISO-NE stated 
that a ``uniform clearing price provides more efficient long run 
investment signals.'' \141\ NEPOOL states that ISO-NE indicated that it 
is open to considering the Commission's proposal for rules that would 
include opportunity costs in the uniform capacity payment, and that it 
was in the process of evaluating market rule changes that would 
accomplish this goal.\142\
---------------------------------------------------------------------------

    \139\ EPSA May 2, 2011 Comments at 5.
    \140\ Beacon May 2, 2011 Comments at 17, CESA May 2, 2011 
Comments at 7, ESA May 2, 2011 Comments at 17 (citing Transcript of 
May 26, 2010 Technical Conference at 149 (lines 15-16)).
    \141\ Beacon May 2, 2011 Comments at 17-18, ESA May 2, 2011 
Comments at 17 (citing NEPOOL Markets Committee presentation, 
``Alternative Technology Regulation Pilot Program.'' November 9, 
2010).
    \142\ NEPOOL May 2, 2011 Comments at 6-7.
---------------------------------------------------------------------------

    88. At the same time, some commenters express concerns regarding 
the inclusion of opportunity costs in the market clearing price for 
frequency regulation capacity. In general, Duke agrees with the 
Commission's proposal to require the market clearing price for 
frequency regulation capacity to be uniform and reflect the marginal 
clearing unit's opportunity costs. However, Duke argues that it is 
uncertain how some storage devices would fit into a capacity payment 
mechanism. For instance, for a resource that is charging part of the 
time and discharging part of the time, Duke believes that when this 
resource is charging (i.e. acting like a load), it should not receive a 
capacity payment.\143\
---------------------------------------------------------------------------

    \143\ Duke May 2, 2011 Comments at 6.
---------------------------------------------------------------------------

    89. NEPOOL and IRC request that the Final Rule afford ISO-NE and 
stakeholders sufficient flexibility to develop a solution that 
accomplishes the Commission's goals, given the current market design's 
consistency with the NOPR proposal and circumstances in the 
region.\144\
---------------------------------------------------------------------------

    \144\ NEPOOL May 2, 2011 Comments at 8, IRC May 2, 2011 Comments 
at 5-6.
---------------------------------------------------------------------------

    90. SoCal Edison argues that, while the CAISO day-ahead market is 
efficient in that it incorporates opportunity costs into a uniform 
clearing price for frequency regulation capacity, the real-time market 
has difficulties capturing inter-temporal opportunity costs due to its 
limited look-ahead time frame.\145\
---------------------------------------------------------------------------

    \145\ SoCal Edison May 2, 2011 Comments at 4-5.
---------------------------------------------------------------------------

    91. PIOs recommend that after implementing the NOPR's proposed 
compensation approach in the RTOs and ISOs, the Commission should 
consider whether the capacity payment component of the method remains 
appropriate or whether, after some level of fast-acting resource 
penetration, the capacity payment proves no longer necessary.\146\
---------------------------------------------------------------------------

    \146\ PIO May 2, 2011 Comments at 10.

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[[Page 67272]]

ii. Calculation of Opportunity Costs
    92. Most commenters state their belief that the RTO or ISO is in 
the best position to calculate a resource's opportunity costs. ENBALA, 
IRC, ISO-NE, NYISO, PIOs, PJM, and Xtreme Power state that the RTO or 
ISO should calculate cross-product opportunity cost for inclusion in 
the capacity payment, as the RTO or ISO has the best information to 
determine a frequency regulation resource's opportunity cost.\147\ PJM 
states that the RTO or ISO is also in the best position to determine 
inter-temporal opportunity costs and should be allowed to calculate 
this as well.\148\
---------------------------------------------------------------------------

    \147\ ENBALA May 3, 2011 Comments at 8, IRC May 2, 2011 Comments 
at 7, ISO-NE May 2, 2011 Comments at 2, PIOs May 2, 2011 Comments at 
P 13, Xtreme Power May 2, 2011 Comments at 6.
    \148\ PJM May 2, 2011 Comments at 5.
---------------------------------------------------------------------------

    93. ISO-NE contends that if the resource owner were required to 
calculate its own cross-product opportunity costs, it would need to 
build into that bid an ex ante risk premium, to account for the 
possibility of large swings in the locational marginal price 
(LMP).\149\ NECPUC shares ISO-NE's concerns over the possibility of ex 
ante determination of opportunity costs and requests that the 
Commission allow for flexibility to address the undue discrimination 
described in the NOPR.\150\
---------------------------------------------------------------------------

    \149\ ISO-NE May 2, 2011 Comments at 13-14.
    \150\ NECPUC May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    94. NEPOOL states that a proposal to include cross-product 
opportunity costs in the regulation clearing price was the subject of 
much discussion during original stakeholder consideration of the 
regulation market re-design in ISO-NE. At that time, according to 
NEPOOL, it was concluded that determining opportunity costs ex ante 
would be significantly more complex than the current ex post method and 
would entail higher implementation costs.\151\ NEPOOL states that it 
has not explicitly considered the inclusion of inter-temporal 
opportunity costs, but it notes that there is no restriction on 
including these costs in a resource's bid.
---------------------------------------------------------------------------

    \151\ NEPOOL May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    95. ELCON is the only commenter to recommend that all opportunity 
costs be market-based and calculated by the supplier. ELCON states that 
the supplier is in the best position to determine these costs.\152\
---------------------------------------------------------------------------

    \152\ ELCON May 2, 2011 Comments at 4.
---------------------------------------------------------------------------

    96. ENBALA states that resources should submit regulation offers 
that reflect inter-temporal opportunity costs.\153\ VCharge states that 
while it does incur inter-temporal opportunity costs, because it is a 
price-taker in the ISO-NE market where it operates, it is uncertain how 
the inclusion of this cost will affect its operation.\154\
---------------------------------------------------------------------------

    \153\ ENBALA May 3, 2011 Comments at 8.
    \154\ VCharge April 27, 2011 Comments at 3.
---------------------------------------------------------------------------

    97. Powerex generally supports inclusion of opportunity costs in 
the market clearing price. However, it argues that inter-temporal 
opportunity costs may be complicated to implement and lead to an 
uneconomic solution. In addition, Powerex believes that inter-temporal 
opportunity costs are unnecessary. Powerex states that resources that 
bid into a day-ahead regulation market will typically know its award by 
1 p.m. prior to the delivery day. As such, the resource will have at 
least 11 hours to ensure its resource is at the desired state by 
participating in the wholesale energy market. Therefore, Powerex 
suggests that inter-temporal opportunity costs only be included in bids 
for resources that are precluded from participation in the wholesale 
energy market.\155\ Powerex requests that the Commission clarify how 
inter-temporal opportunity costs will work in practice.\156\
---------------------------------------------------------------------------

    \155\ Powerex May 2, 2011 Comments at 6-8.
    \156\ Id. at 5.
---------------------------------------------------------------------------

    98. CAISO states that its current market design allows a regulating 
resource to earn the marginal resource's opportunity cost, including 
cross-product opportunity costs. CAISO asserts that while there is no 
formal compensation mechanism for inter-temporal opportunity costs, 
bidding rules do not prevent scheduling coordinators from including 
them in supply bids. CAISO requests that the Final Rule not preclude 
the use of such informal compensation mechanisms to account for inter-
temporal opportunity costs.\157\
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    \157\ CAISO May 2, 2011 Comments at 17-18.
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c. Commission Determination
    99. The Commission finds that paying to all cleared frequency 
regulation resources a uniform clearing price that includes the 
marginal resource's opportunity costs is just and reasonable. 
Accordingly, this Final Rule requires that all RTOs and ISOs with 
centrally-procured frequency regulation resources must provide for such 
opportunity costs in their tariffs. Further, this uniform clearing 
price must be market-based, derived from market-participant bids for 
the provision of frequency regulation capacity. As commenters 
recognize, contrary market pricing rules would consistently result in 
artificial and inaccurate prices that do not include the total cost of 
reserving regulation capacity. In addition, paying an out-of-market 
unit-specific opportunity cost, rather than a uniform clearing price, 
can result in the market basing the commitment of regulating units on 
bids that do not reflect the true cost of providing capacity, 
potentially leading to committing units with higher costs than other 
units not committed. By not paying a uniform clearing price, it is 
possible, for instance, to dispatch a unit with relatively low explicit 
capacity costs but very high opportunity costs, rather than a lower-
cost unit which has relatively higher explicit capacity costs but low 
opportunity costs. This can result in distorted investment and entry 
decisions by market participants. Paying to all cleared frequency 
regulation resources a uniform price that includes opportunity costs 
will ensure that all appropriate costs are considered and will send an 
efficient price signal to current and potential market participants. 
This will also be consistent with long-standing Commission policy 
approving uniform clearing prices.\158\
---------------------------------------------------------------------------

    \158\ See, e.g., PJM Interconnection, L.L.C., 117 FERC ] 61,331, 
at P 141 (2006); Commonwealth Edison Company, 113 FERC ] 61,278, at 
P 43 (2005) (citing New York Independent System Operator, Inc., 
order on reh'g, 110 FERC ] 61,244, at P 65 n.76 (2005) (explaining 
that NYISO uses this method because ``under this model, the 
generator has the proper incentive to bid the lowest price that 
covers its marginal cost, knowing that if the market produces a 
higher price it will receive the market price'')); and New England 
Power Pool, 85 FERC ] 61,379 (1998), reh'g denied, 95 FERC ] 61,478, 
at 61,074 (2001) (approving market clearing prices in energy and 
ancillary services markets).
---------------------------------------------------------------------------

    100. We decline to specify, as requested by Duke, certain 
circumstances under which certain resources should not receive the 
capacity payment. Specifically, Duke provides the example of an energy 
storage resource, stating that it should not be eligible for a capacity 
payment during the time it charges in order to attain a charge state 
that allows it to provide frequency regulation service. Duke's example 
ignores the fact that a storage resource that is charging could be, at 
the same time, providing frequency regulation service at the direction 
of the system operator and therefore is appropriately paid for the 
capacity it sets aside to provide frequency regulation service. We 
recognize that some RTOs and ISOs manage the charge state of energy 
storage resources, while others do not. We find that it is appropriate 
to allow the RTOs and ISOs flexibility in addressing this issue and 
explaining any implications for compensation.
    101. The Commission rejects PIOs' argument that the capacity 
payment should be wholly discontinued, in the event that it proves no 
longer necessary.

[[Page 67273]]

The capacity payment is necessary, because it exists in order to ensure 
that resources are indifferent between offering their capacity as a 
frequency regulation resource or as an energy resource. While the 
market-clearing price for frequency regulation service may eventually 
fall as lower-cost resources enter the market, the capacity payment 
provides resources that clear as frequency regulation capacity 
recompense for holding such capacity in reserve from the energy and 
other markets so that it is available to the system operator as 
frequency regulation capacity.
    102. Regarding cross-product opportunity costs, which reflect the 
foregone opportunity to participate in the energy or ancillary services 
markets, the Commission finds that it is appropriate for the RTOs and 
ISOs to calculate this and include it in each resource's offer to 
supply frequency regulation capacity, for use when determining the 
market clearing price and which resources clear. Therefore we will 
require this. We agree with PJM, NYISO, IRC, and other commenters which 
state that the RTOs and ISOs have the necessary and accurate 
information for determining this cost. Further, ISO-NE and NEPOOL both 
express concern that requiring a resource to bid in its own cross-
product opportunity costs could result in inefficient prices as 
resources include a risk premium. We disagree with ELCON's argument 
that the resource is in the best position to determine its cross-
product opportunity costs. Because cross-product opportunity costs are 
calculated based on the clearing prices of other energy and ancillary 
service products, specific knowledge of the market variables used to 
formulate these prices is necessary in order to accurately calculate 
the opportunity cost of providing frequency regulation service. RTOs 
and ISOs have unique access to this information and, accordingly, RTOs 
and ISOs are in the best position to perform accurate cross-product 
opportunity cost calculations.
    103. Regarding inter-temporal opportunity costs, there is little 
agreement on how these costs should be calculated, and to whom that 
responsibility should fall. The Commission will require the RTOs and 
ISOs to allow for inter-temporal opportunity costs to be included in a 
resource's offer to sell frequency regulation service, with the 
requirement that the costs be verifiable. We find that inter-temporal 
opportunity costs are a legitimate cost for a market participant to 
include in its offer to sell frequency regulation and thus must be 
allowed. However, we will allow the RTOs and ISOs to propose who is 
responsible for calculating such costs, whether the RTO or ISO itself 
or market participants.
2. Payment for Performance
a. NOPR Proposal
    104. The Commission preliminarily found that requiring a component 
in the frequency regulation compensation mechanism that recognizes the 
resource's real-time provision of frequency regulation service is 
necessary to remedy undue discrimination and ensure just and reasonable 
rates in the organized wholesale electricity markets.\159\ As stated in 
the NOPR, resources that provide more value to the grid by doing more 
of the work to correct ACE deviations, through the provision of 
frequency regulation service, should be paid more than resources doing 
less work. Accordingly, taking performance into consideration is a key 
element of ensuring that any frequency regulation compensation 
mechanism is just and reasonable. The Commission, therefore, proposed 
to require that all regulating resources be paid for their performance, 
for instance, with this payment taking the form of a payment for each 
MWh, up or down, provided by the resource in response to the system 
operator's dispatch signal. Specifically, an RTO or ISO would determine 
the total movement up and down and then multiply that sum by a price-
per-MWh of ACE correction. The NOPR solicited comment on the proposed 
method and whether there are alternative payments for performance that 
address concern about undue discrimination.\160\
---------------------------------------------------------------------------

    \159\ NOPR, 134 FERC ] 61,124 at P 37.
    \160\ Id. P 37.
---------------------------------------------------------------------------

    105. The Commission also proposed that the price-per-MWh of ACE 
correction be market-based. Specifically, resources would specify the 
capacity (in MW) available to provide regulation, a ramp rate (in MW/
minute), and bid into the market a price-per-MW ramping capability or a 
price-per-MWh of ACE correction. The RTO or ISO would then determine 
the least cost set of resources and set the price-per-MWh of ACE 
correction based on the bid of the marginal regulating resource. The 
alternative to a market-based price is to use an administratively set 
price-per-MWh of ACE correction. The Commission sought comment on this 
proposal as well as the alternative of an administratively determined 
price, including how an administratively determined price could be set.
b. Comments
i. Market-Based Pricing Versus Administratively-Determined Prices
    106. Regarding whether the price used to calculate the performance 
payment should be market-based or administratively-determined, the 
majority of commenters who commented on this topic expressed a 
preference for a market-based option.\161\ They argue that market-based 
pricing will encourage resources with the lowest costs to provide 
regulation movement to enter the market and ensure that rate-payers 
receive the benefit of new low-cost resources competing in the market. 
According to commenters, allowing the market to establish the 
compensation for resources' performance will allow more economically 
efficient outcomes and create appropriate incentives for market 
participants. Specifically, they contend, a market-based price would 
encourage resources to make bids that accurately reflect their costs of 
ramping up and down, and thus would ensure that resources which can 
provide ramping capability most cost-effectively will be selected and, 
in turn, should lower costs to customers.\162\
---------------------------------------------------------------------------

    \161\ Beacon May 2, 2011 Comments at 30, ESA May 2, 2011 
Comments at 29, EDF May 2, 2011 Comments at P 17, ELCON May 2, 2011 
Comments at 4, PJM May 2, 2011 Comments at 7, Powerex May 2, 2011 
Comments at 8-9, SoCal Edison May 2, 2011 Comments at 10, TAPS May 
2, 2011 Comments at 8, Xtreme Power May 2, 2011 Comments at 7.
    \162\ Xtreme Power May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    107. Powerex claims that use of a forecast for ACE correction would 
allow RTOs and ISOs to include the mileage payment in their co-
optimization and determine an appropriate market clearing price for the 
mileage payment.\163\ PJM states that the proposed dollars-per-MW 
bidding and market-clearing mechanisms best capture the market-based 
value of ramping regulating units, and can be efficiently and 
accurately modeled in market-clearing algorithms. PJM suggests that on-
going updates to these models will be required to ensure that market 
results and compensation correctly align with resource 
performance.\164\
---------------------------------------------------------------------------

    \163\ Powerex May 2, 2011 Comments at 8.
    \164\ PJM May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    108. TAPS argues that to require that performance payments for 
frequency regulation service be administratively-determined would be 
especially disruptive to region-specific market designs and 
unwarranted. It argues that it would not be in the public interest to 
then require that prices in this market segment be administratively-

[[Page 67274]]

determined.\165\ TAPS notes that no showing has been made, and there is 
no reason to expect, that the maximum necessary price to elicit 
frequency response offers cannot be revealed through a properly 
structured bid-based market.\166\
---------------------------------------------------------------------------

    \165\ TAPS May 2, 2011 Comments at 8.
    \166\ Id. at 9-10.
---------------------------------------------------------------------------

    109. Although supporting a market-based price, Powerex argues that 
if the Commission finds that an administratively-set price is 
appropriate, that price should be based on the frequency regulation 
capacity price, in order to provide transparency and certainty for 
market participants.\167\
---------------------------------------------------------------------------

    \167\ Powerex May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

ii. Calculating the Performance Payment and Bidding Parameters
    110. Regarding the form a performance payment should take, Beacon 
and ESA both state that they support a performance payment that takes 
the form of a payment for each MW, up or down, provided by the resource 
in response to the system operator's dispatch signal multiplied by a 
market-based price per MW-movement based on the marginal unit's cost to 
ramp up and down.\168\ Beacon argues that this would correspond to each 
resource's contribution to ACE correction and is consistent with what 
it views as industry best practices, i.e. the current policy in ISO-
NE.\169\ Beacon cites data from its ISO-NE operation to show that the 
mileage payment it receives is approximately three times that of an 
allowable slower-responding resource, yet it actually does more than 
three times the work.\170\
---------------------------------------------------------------------------

    \168\ Beacon May 2, 2011 Comments at 19, ESA May 2, 2011 
Comments at 27-28.
    \169\ Beacon May 2, 2011 Comments at 27.
    \170\ Id. at 28.
---------------------------------------------------------------------------

    111. Beacon and ESA contend that a payment to all resources based 
on their MW movement, up and down, will encourage all resources to 
offer as much ramp-rate capability as possible because the resource 
will be compensated for the additional movement (and additional costs 
it incurs) to provide this service.\171\ Beacon and ESA further argue 
that having bidding parameters that match the way payments are 
ultimately calculated will aid resources in determining their bidding 
strategy.\172\ Beacon and ESA recommend that the appropriate bidding 
parameters include the total MW offered for frequency regulation and 
the $/MW of ramping capability. They contend that the cost for ramping 
up and down in response to an RTO or ISO control signal is the 
increased fuel costs of operating in a non-steady state condition, the 
increased costs of operations and maintenance due to additional ``wear 
and tear'' on the equipment, and potentially the cost of decreased 
cycle life.\173\
---------------------------------------------------------------------------

    \171\ Beacon May 2, 2011 Comments at 29, ESA May 2, 2011 
Comments at 28.
    \172\ Beacon May 2, 2011 Comments at 29, ESA May 2, 2011 
Comments at 28.
    \173\ Beacon May 2, 2011 Comments at 30, ESA May 2, 2011 
Comments at 29.
---------------------------------------------------------------------------

    112. CESA recommends that each resource should bid in its price-
per-MW of movement for regulation service and the system operator 
should set the price-per-MW used in the performance payment at the 
price of the marginal unit's bid. While CESA notes that another method 
for calculating the performance payment would be to base it on the 
total amount of MWh of ACE correction, no matter the method used, it is 
most important that the bidding parameters match the way compensation 
is calculated so that resources can most easily determine their bidding 
strategy.\174\
---------------------------------------------------------------------------

    \174\ CESA May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

    113. CAISO questions whether the ISO's bid optimization and 
ultimate performance payment should reflect a resource's pre-certified 
ramping capability or a resource's actual performance for which a 
resource would receive a payment for moving in either the up or down 
direction.\175\
---------------------------------------------------------------------------

    \175\ CAISO May 2, 2011 Comments at 19.
---------------------------------------------------------------------------

    114. OMS and VCharge ask the Commission to clarify the need for 
both a price-per-MWh ramping capability and price-per-MW of ACE 
correction parameters in a frequency regulation service offer.\176\ OMS 
indicates that it is not consistent to have both of these pricing 
parameters in the ramping portion of the frequency regulation offer. 
OMS states that it interprets price-per-MWh as a parameter on which the 
system operator would make dispatch decisions, while price-per-MW of 
ACE correction would be a parameter used for determining the market-
clearing price for ramp. Once a clarification is made, OMS requests 
further time to comment on that clarification.\177\
---------------------------------------------------------------------------

    \176\ OMS May 2, 2011 Comments at 7, VCharge May 2, 2011 
Comments at 4 (citing the NOPR at P 37).
    \177\ OMS May 2, 2011 Comments at 7-8.
---------------------------------------------------------------------------

    115. ENBALA argues that compensating resources based on a price-
per-MW of ACE correction bid is not advisable. It argues that 
calculating such a bid price would be difficult for the resource, as 
would be verification of the bid. It contends that settlement would 
also be complex. ENBALA recommends instead that resources submit a 
price-per-MW ramping ability, which would reflect the costs associated 
with movement of the device, i.e. variable O&M costs such as fuel 
consumption and mechanical fatigue.\178\
---------------------------------------------------------------------------

    \178\ ENBALA May 2, 2011 Comments at 8.
---------------------------------------------------------------------------

    116. Primus Power recommends that compensation for performance be 
based on the net energy contribution of a resource. Primus Power 
defines this as the total MWh delivered by the resource in the 
direction of the control signal minus the total MWh delivered against 
the control signal (or delivered in excess of the control signal). This 
would determine the quantity for which the frequency regulation service 
provided would be compensated. To determine the price, Primus Power 
proposes using the market clearing price for frequency regulation 
capacity as a basis. Specifically, Primus Power recommends multiplying 
the capacity price by some weight, and then multiplying this by the MWh 
the resource delivered over the settlement period, as a fraction how 
much an ``ideal'' resource would have delivered.\179\
---------------------------------------------------------------------------

    \179\ Primus Power April 18, 2011 Comments at 6.
---------------------------------------------------------------------------

    117. Regarding how resources would bid their costs into such a 
market, NEPOOL states that the ISO-NE regulation market currently 
operates on a system that minimizes total customer payment, and it 
supports the continued application of the current market design.\180\
---------------------------------------------------------------------------

    \180\ NEPOOL May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

    118. TAPS argues that a resource's offering price-per-MW of ACE 
correction should be expected to typically reflect only variable 
operating costs for oscillating a resource's output instead of holding 
it steady. TAPS provides an example to illustrate that the resource's 
offer price for frequency regulation service ought to reflect the 
amount of revenue that would make the resource indifferent between 
being dispatched up and down around its set point over some period of 
time and sitting constant at the set point. This offer can be 
calculated by the resource.\181\ In addition, TAPS notes that bids for 
frequency regulation may require mitigation in certain circumstances. 
TAPS states that regional market designs should provide for mitigation, 
and the Commission should defer to the regions to decide what 
mitigation scheme would be effective.\182\
---------------------------------------------------------------------------

    \181\ TAPS May 2, 2011 Comments 9-10.
    \182\ Id. at 10.
---------------------------------------------------------------------------

    119. SoCal Edison encourages the Commission to consider both ex 
ante and ex post calculation of market prices. SoCal Edison states that 
an ex ante approach will likely make it easier to

[[Page 67275]]

establish a clearing price for the service, whereas an ex post 
performance payment ensures the market only pays for what was 
delivered.\183\
---------------------------------------------------------------------------

    \183\ SoCal Edison May 2, 2011 Comments at 10.
---------------------------------------------------------------------------

    120. Both ESA and Beacon recommend that the Commission allow the 
RTOs and ISOs to base their compensation schemes on a single bid if it 
so chooses; that is, as is done in ISO-NE, one bid can be submitted 
reflecting the costs of frequency regulation capacity, and from this, 
the payment for both capacity and performance can be determined. Beacon 
and ESA state that this has been used successfully in ISO-NE, where the 
split of compensation is administratively determined in order for an 
``average'' resource to receive half its compensation from the capacity 
payment and half from its performance payment. Both ESA and Beacon 
state that while this does not allow ISO-NE to optimize in real-time 
like a two-bid market would, it does send the correct price signals to 
market participants.\184\
---------------------------------------------------------------------------

    \184\ Beacon May 2, 2011 Comments at 31-33, ESA May 2, 2011 
Comments at 30-32.
---------------------------------------------------------------------------

iii. Creating a New Ancillary Service Product
    121. Various commenters suggest that the Commission specifically 
define faster- and slower-ramping resources, or use speed to 
distinguish various resources for purposes of calculating the 
performance payment.
    122. For example, Viridity and Starwood/Premium recommend that 
``fast'' and ``slow'' resources be treated as different products or 
offering different services.\185\ Viridity further recommends that the 
Commission not change how slow resources are compensated for the 
provision of frequency regulation service, i.e. make no performance 
payment to slow resources. However, Viridity would have the Commission 
require that a performance payment be made to fast resources providing 
frequency regulation service.
---------------------------------------------------------------------------

    \185\ Viridity May 2, 2011 Comments at 2.
---------------------------------------------------------------------------

    123. Viridity also suggests that the performance payment made to 
fast responding resources be based on the price-per-MWh of ACE 
correction, rather than a price-per-MW of ACE correction.\186\
---------------------------------------------------------------------------

    \186\ More explanation can be found below in our discussion of 
accuracy, where Viridity's proposal for an accuracy measure is 
discussed. Viridity May 2, 2011 Comments at 6.
---------------------------------------------------------------------------

    124. Manitoba Hydro asserts that when regulation prices are market-
based, ancillary market design should establish a clearing price that 
preserves the value ratio between fast and slow ramping resources. 
Manitoba Hydro suggests that this could be accomplished by establishing 
fast, medium and slow regulation products, and clearing the market with 
the constraint that more valuable products must clear at a higher 
price.\187\
---------------------------------------------------------------------------

    \187\ Manitoba Hydro May 2, 2011 Comments at 4.
---------------------------------------------------------------------------

    125. CAISO argues that system operators could define a fast-ramping 
ancillary service product with a ramp requirement based upon a change 
in output over a period of time, such as four seconds. It contends that 
System operators would then use fast-ramping resources as primary 
responders to changes in ACE.
iv. Other Comments Regarding the Performance Payment
    126. SoCal Edison adds that after market system design, each market 
will have to be scrutinized for criteria such as barriers to entry. If 
analyzing the new system does not reveal workable competition, then the 
Commission will have to define market power mitigation before letting 
such markets run.\188\
---------------------------------------------------------------------------

    \188\ SoCal Edison May 2, 2011 Comments at 10.
---------------------------------------------------------------------------

    127. TAPS does allow that in some necessary instances, regional 
market designs should provide for mitigation, and it may well be 
appropriate to mitigate offers down to an administratively-determined 
level where the resource is indifferent between providing frequency 
regulation service (actual movement up and down) and remaining steady 
at a given set point.\189\
---------------------------------------------------------------------------

    \189\ TAPS May 2, 2011 Comments 10.
---------------------------------------------------------------------------

c. Commission Determination
i. Market-Based Pricing Versus Administratively-Determined Prices
    128. The Commission will require use of a market-based price, 
rather than an administratively-determined price, on which to base the 
frequency regulation performance payment. This price must reflect the 
market participant bids submitted by resources for the provision of 
frequency regulation service. As commenters note, a market-based price 
for frequency regulation will encourage market participants to 
accurately bid their cost to provide the service. A resource that 
chooses to increase its offer price could find itself in a position of 
not being dispatched and, therefore, losing potential revenues. 
Additionally, unlike an administratively-based price, which could be 
subject to a potentially lengthy stakeholder and/or adjudicative 
process each time the price was changed, a market-based price will 
better reflect current system conditions and need for frequency 
regulation, thereby providing market participants with an efficient 
price signal.
    129. Further, as PJM states, a market-based price can be 
efficiently and accurately modeled in the market-clearing algorithm. 
For these reasons, we find it just and reasonable to require that all 
RTOs and ISOs base their payment for frequency regulation service on a 
market-based price.
    130. However, as described more fully in the next section, unlike 
what was proposed in the NOPR, we will not require a specific 
methodology for how that market-based price shall be determined. We 
will not mandate specific bidding parameters or other technical details 
that will determine the pricing methodology. We will require two-part 
bidding; though we are mindful that CAISO and ISO-NE each noted the 
expected difficulty or ease with which the proposed NOPR changes can be 
integrated into existing market solution software. ISO-NE's concerns 
about two-part bidding, in particular, are addressed by the flexibility 
we will allow in the bidding parameters that the RTOs and ISOs may use 
and in that we will not mandate a specific method by which the RTOs and 
ISOs must specify their market-clearing algorithms that determine 
dispatch. The Commission recognizes that two-part bidding solutions are 
not insignificant problems.\190\ However, they can be overcome, and we 
believe the time-frame that we have required will allow sufficient time 
to overcome such hurdles. Beyond this, the Commission will withhold 
judgment on the RTOs and ISOs' specific proposals until receiving the 
compliance filings ordered below. As TAPS states, market participants 
have invested heavily in market software and hardware, and the 
different regional markets operate slightly differently in how their 
markets function. We conclude that mandating a standardized solution on 
this issue could result in significant costs and disruption of existing 
stakeholder processes. Therefore, we will allow the RTOs and ISOs to 
determine how to implement the market-based pricing we are mandating, 
as discussed in the compliance section below.
---------------------------------------------------------------------------

    \190\ The problem of simple scoring rules used to solve two-part 
bids is illustrated, for example, in Swider, Derk J. ``Efficient 
Scoring-Rule in Multipart Procurement Auctions for Power System 
Reserve'' IEEE Transactions on Power Systems, 22(4): 1717-1725.
---------------------------------------------------------------------------

ii. Calculating the Performance Payment and Bidding Parameters
    131. Because RTO and ISO markets do not all operate in the same 
manner, the Commission will not mandate a

[[Page 67276]]

particular form that the performance payment must take. Nor will we 
mandate specific bidding parameters or other technical specifications 
(including requirements for qualification as a regulation resource). 
Given regional differences, we direct the RTOs and ISOs to propose the 
specific technical requirements that will meet the requirements of this 
Final Rule. We will require, however, that the clearing performance 
price be paid uniformly to all resources cleared during the same 
settlement period, for the same reasons discussed above. A uniform 
clearing price sends an efficient price signal to all current and 
potential market participants. Further, paying a uniform clearing price 
in this instance is consistent with long-standing Commission 
policy.\191\
---------------------------------------------------------------------------

    \191\ See supra n.153.
---------------------------------------------------------------------------

    132. While several commenters state their preference for a 
particular method for calculating the performance payment, there is no 
compelling evidence that one method will work best in all RTOs and 
ISOs. As CESA notes, there could be more than one efficient way to 
compensate performance; but resources should be paid a uniform price 
for their frequency regulation service.
    133. In addition, we clarify that the NOPR proposal was not 
intended to tie the performance payment explicitly to a resource's ACE 
correction. The performance payment proposed in the NOPR was based on 
the amount of up and down movement, in megawatts, the resource provides 
in response to a control signal.\192\ We recognize that, if an RTO or 
ISO were to compensate a resource based on how well it corrects ACE, 
resources would have the incentive to try to second-guess dispatch 
signals in an effort to meet this potentially contradictory goal. A 
resource's performance must be measured based on the absolute amount of 
regulation up and regulation down it provides in response to the system 
operator's dispatch signal.
---------------------------------------------------------------------------

    \192\ NOPR, 134 FERC ] 61,124 at P 34 and 37.
---------------------------------------------------------------------------

    134. In response to SoCal Edison's argument that any performance 
payment system should only pay for services actually provided, the 
Commission agrees and believes that measuring accuracy, as is required 
below, will account for this. In response to OMS and VCharge, who 
question the need for both a price-per-MWh ramping capability and 
price-per-MW of ACE correction, the Commission did not intend to state 
that there was a need for both alternatives.\193\
---------------------------------------------------------------------------

    \193\ See 134 FERC ] 61,124 at P 38. The sentence should have 
read ``Specifically, resources would specify the capacity (in MW) 
available to provide regulation, a ramp rate (in MW/min), and bid 
into the market a price-per-MWh ramping capability or price-per-MW 
of ACE correction.''
---------------------------------------------------------------------------

iii. Creating a New Ancillary Service Product
    135. In response to Manitoba Hydro and other comments, we do not 
believe it is necessary to define faster- and slower-ramping resources 
or use speed to distinguish among resources to create new ancillary 
services products based on the ramping speed in the context of this 
rulemaking. The purpose of this Final Rule is to remedy undue 
discrimination in compensation for the existing frequency regulation 
service employed by RTOs and ISOs by ensuring that frequency regulation 
resources are compensated based on individual performance and ensure 
that all eligible resources, not just traditional resources and not 
just non-traditional resources, providing frequency regulation service 
within RTO or ISO regulation markets are compensated at the just and 
reasonable rate. While we do not choose to require additional 
categories of ancillary services based on ramping speeds in the context 
of this rulemaking, we do recognize that there may be value in having a 
certain level of granularity in defining the ancillary service 
products. Most of the ancillary services are defined by certain 
characteristics, and we understand that numerous different ancillary 
service products could be created based on the characteristics of 
different suppliers. We understand that the RTOs and ISOs and market 
monitors will continue examining the ancillary service product 
definitions and may propose to create new ancillary services as market 
needs evolve.\194\
---------------------------------------------------------------------------

    \194\ See, e.g., CAISO's flexible ramping constraint, available 
at http://www.caiso.com/informed/Pages/StakeholderProcesses/FlexibleRampingConstraint.aspx.
---------------------------------------------------------------------------

iv. Other Comments Regarding the Performance Payment
    136. As to SoCal Edison's and TAPS's concerns about the issue of 
market power mitigation, we agree that there may be circumstances under 
which an RTO or ISO may wish to test for market power and potentially 
impose mitigation. We note that the Commission has approved market 
power mitigation in frequency regulation markets.\195\ This rule 
requires fundamental changes to the way RTOs and ISOs procure and 
compensate frequency regulation resources, which may render existing 
RTO and ISO market power rules insufficient for purposes of addressing 
market power concerns. Given the Commission's recognition of the need 
for proper mitigation methods in the current RTO and ISO markets, we 
will require the RTOs and ISOs either to submit tariff provisions for 
market power mitigation methods appropriate to redesigned frequency 
regulation markets or to explain how their current mitigation methods 
are sufficient to address market power concerns given the changes 
required in this rulemaking.
---------------------------------------------------------------------------

    \195\ See PJM Interconnection, LLC, 125 FERC ] 61,231 (2008).
---------------------------------------------------------------------------

3. Accuracy
a. NOPR Proposal
    137. The Commission proposed that the performance payment reflect 
the resource's accuracy in following the system operator's dispatch 
signal. Specifically, the Commission proposed that the accuracy be 
measured by the RTO or ISO using currently available telemetry 
technology. If an RTO or ISO receives telemetry data every 10 seconds, 
for instance, it would be able to measure over the course of 5 minutes 
how often the resource was delivering exactly the megawatts requested. 
The resource would then be compensated for the fraction of its mileage 
that met the dispatch signal. This would provide a disincentive to 
deviate from the dispatch signal, which incorporates actual ramping 
ability.
    138. The Commission noted that there was little agreement among the 
technical conference panelists on how accuracy should be incorporated 
into the frequency regulation market design. Therefore, the NOPR sought 
comments on alternative methods, including methods to incorporate 
accuracy into the ACE correction calculation. The Commission posited 
that it is possible to approximate how a resource contributes to 
correcting ACE by taking the difference between the energy it provides 
that was in the direction needed to correct ACE at any moment and the 
energy that was in the direction opposite to what was needed to correct 
ACE. Thus, a resource's payment for ACE correction could only include 
the MWh that were actually correcting ACE. The Commission sought 
comments on how to structure payments for frequency regulation that 
compensate a resource for its contribution to ACE correction. We sought 
comment on whether this method could result in a resource being 
penalized through lower mileage even

[[Page 67277]]

when it is following the system operator's dispatch signal.\196\
---------------------------------------------------------------------------

    \196\ NOPR, 134 FERC ] 61,124 at P 40.
---------------------------------------------------------------------------

b. Comments
    139. A number of commenters state their support for some form of 
accuracy adjustment for frequency regulation service performance 
payments.\197\ Most, however, are clear in their recommendation that an 
accuracy measure reflect how accurately a resource follows the system 
operator's dispatch signal and not be based on any measure of how the 
resource contributes to ACE correction. Several also emphasize the 
importance of allowing RTOs and ISOs flexibility in how they devise 
their own accuracy measures.
---------------------------------------------------------------------------

    \197\ Alcoa May 2, 2011 Comments at 2, Beacon May 2, 2011 
Comments at 38-39, CESA May 2, 2011 Comments at 11, ESA May 2, 2011 
Comments at 34-36, Duke May 2, 2011 Comments at 7, EDF May 2, 2011 
Comments at 21, ENBALA May 2, 2011 Comments at 3, IRC May 2, 2011 
Comments at 3-4, ISO-NE May 2, 2011 Comments at 6-8, NEPOOL May 2, 
2011 Comments at 10, Manitoba Hydro May 2, 2011 Comments at 3, NYISO 
May 2, 2011 Comments at 2 and 4-5, OMS May 2, 2011 Comments at 6-7, 
PJM May 2, 2011 Comments at 7-8, Powerex May 2, 2011 Comments at 9-
10, Primus Power May 2, 2011 Comments at 6, SoCal Edison May 2, 2011 
Comments at 2, Viridity May 2, 2011 Comments at 4-5, and Xtreme 
Power May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    140. Beacon, CESA, and ESA state that an accuracy metric will 
encourage resources to accurately respond to the control signal sent by 
the ISO and will ensure that the performance payment is truly tied to 
the resource's actual service provided.\198\ Beacon and ESA state that 
the NYISO's performance index is a good example of an accuracy metric. 
Beacon also states that, while NYISO provides a good model, the 30 
second snapshot of accuracy is too slow to capture the accuracy of a 
storage resource that can dramatically change its output each 6 second 
AGC cycle. Therefore, Beacon recommends that any accuracy metric be 
capable of measuring performance each AGC dispatch cycle and account 
for any latency in the ISO's dispatch software.\199\ Further, Beacon 
and ESA warn that compensating a resource for accuracy alone is not 
sufficient to send efficient price signals. They contend that the 
accuracy adjustment must be tied to a performance payment.\200\
---------------------------------------------------------------------------

    \198\ Beacon May 2, 2011 Comments at 38, CESA May 2, 2011 
Comments at 11, ESA May 2, 2011 Comments at 34.
    \199\ Beacon May 2, 2011 Comments at 38.
    \200\ Beacon May 2, 2011 Comments at 38, ESA May 2, 2011 
Comments at 35.
---------------------------------------------------------------------------

    141. ENBALA believes that a real-time accuracy metric should be 
calculated by the RTO or ISO to reflect how accurately the regulation 
provided by a resource follows the regulation requested. But ENBALA 
cautions that the accuracy metric should take into account the time 
needed to communicate data and the frequency with which the dispatch 
signal can change.\201\ Like ENBALA, Manitoba Hydro supports an 
accuracy measure provided that telemetry update frequency and latency 
are adequately considered.\202\
---------------------------------------------------------------------------

    \201\ ENBALA May 3, 2011 Comments at 3.
    \202\ Manitoba Hydro May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    142. In response to the Commission's inquiry about whether a 
resource should be compensated for performance when it is moving in a 
direction that is against ACE, Beacon, CESA, and ESA recommend 
subtracting from the sum of the resource's total MW of up and down 
movement any movement that is not in the direction of correcting ACE. 
They state that this could penalize a resource even when it is 
following the system operator's dispatch signal, but that this is 
appropriate because it further aligns the payment the resource receives 
with the value it provides to the grid.\203\ At the same time, Beacon 
and ESA acknowledge that a reward or penalty structure should not 
change the requirement that a resource follow the operator's dispatch 
signal.\204\
---------------------------------------------------------------------------

    \203\ Beacon May 2, 2011 Comments at 39, CESA May 2, 2011 
Comments at 11, ESA May 2, 2011 Comments at 35-36.
    \204\ Beacon May 2, 2011 Comments at 40, ESA May 2, 2011 
Comments at 36.
---------------------------------------------------------------------------

    143. Duke agrees with the Commission's proposal that a resource's 
accuracy in following a dispatch signal should be compensated through a 
performance payment. However, Duke does not agree with the proposal 
that a resource be penalized if its MWh contribution works against 
needed ACE correction yet is compliant with the system operator's 
dispatch signal. Duke cites the situation where a system operator is 
dispatching resources, but the dispatch signal is not designed just to 
correct ACE.\205\
---------------------------------------------------------------------------

    \205\ Duke May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    144. The IRC, ISO-NE, NEPOOL, CAISO, PJM, MISO, NYISO, OMS, and 
SoCal Edison recommend that the accuracy metric should be designed to 
provide an incentive to follow operational instructions that facilitate 
compliance with the system operator's dispatch signal, rather than 
focusing narrowly on rewarding ACE correction efforts.\206\ ISO-NE 
asserts that compensation for accuracy should not be based solely on 
how well resource output tracks ACE. It contends that this creates an 
incentive for a resource owner to ignore, or second-guess, an ISO's 
dispatch signal. ISO-NE explains that central dispatch allows an ISO to 
take advantage of its superior information to produce a coordinated AGC 
dispatch that produces the lowest cost result. This dispatch may differ 
from the outcome that would result from resources individually chasing 
after the expected ACE needs or otherwise second-guessing the 
operator's dispatch signal. CAISO suggests that paying for response to 
a control signal rather than ACE correction would be easier to 
implement, avoids potential adverse impacts to slow resources, and does 
not tie compensation to one measure of ACE.
---------------------------------------------------------------------------

    \206\ IRC May 2, 2011 Comments at 3-4, ISO-NE May 2, 2011 
Comments at 6-8, NEPOOL May 2, 2011 Comments at 10, CAISO May 2, 
2011 Comments at 12-14 and 18-19, PJM May 2, 2011 Comments at 7-8, 
MISO May 2, 2011 Comments at 7-8, NYISO May 2, 2011 Comments at 2, 
OMS May 2, 2011 Comments at 6-7, SoCal Edison May 2, 2011 Comments 
at 2.
---------------------------------------------------------------------------

    145. At the same time, ISO-NE warns that compensation not be based 
solely on how closely a resource tracks its AGC dispatch signal. ISO-NE 
imagines a situation where frequency regulation resources actually 
reduce their reported ramping capability and offer in less capacity in 
order to more easily follow the dispatch signal. ISO-NE states that 
this could defeat the entire purpose of paying for performance.\207\ 
With this in mind, ISO-NE recommends that the Commission adopt a final 
rule that provides the flexibility for accuracy considerations to be 
incorporated into the determination of frequency regulation service 
eligible for compensation, or into other measures of regulation 
performance that may be more appropriate for RTOs and ISOs in different 
regions of the country.\208\ ISO-NE also notes that measuring accuracy 
is complex because it requires knowing the realistic performance 
characteristics of each resource and presumes reliable instrumentation 
and dependable communications.\209\ NEPOOL supports retaining ISO-NE's 
current method of measuring performance.\210\
---------------------------------------------------------------------------

    \207\ ISO-NE May 2, 2011 Comments at 6-7.
    \208\ Id. at 8.
    \209\ Id. at 6.
    \210\ NEPOOL May 2, 2011 Comments at 10.
---------------------------------------------------------------------------

    146. In addition, CAISO argues that linking the performance payment 
to ACE correction adds unnecessary complexity to settlement of 
regulation transactions.\211\ MISO also raises the concern that the 
introduction of an accuracy consideration to the performance payment 
could require substantial modifications to existing

[[Page 67278]]

RTO and ISO algorithms, and other dispatch and accounting tools.\212\
---------------------------------------------------------------------------

    \211\ CAISO May 2, 2011 Comments at 18-19.
    \212\ MISO May 2, 2011 Comments at 8.
---------------------------------------------------------------------------

    147. OMS is concerned both about technical issues, such as needed 
telemetry, as well as, for example, a situation where a resource is 
following dispatch instructions, but those dispatch instructions are 
contrary to ACE. In that case, a resource following the dispatch 
instruction should not be penalized, OMS says.\213\
---------------------------------------------------------------------------

    \213\ OMS May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    148. Primus Power and Viridity generally support the Commission's 
proposal but offer their own versions of how accuracy should be 
measured. As describes above, Primus Power recommends that ``net energy 
contribution'' be the metric used to determine performance payment. It 
defines this as the total MWh delivered by the resource in the 
direction of the control signal minus the total MWh delivered against 
the control signal (or delivered in excess of the control signal). 
Primus Power would use this as the basis on which to base a resource's 
performance payment.\214\
---------------------------------------------------------------------------

    \214\ Primus Power April 18, 2011 Comments at 6.
---------------------------------------------------------------------------

    149. Viridity recommends an accuracy measure that can be broken 
into three types of performance. A resource that performs perfectly 
delivers exactly the MWh as dispatched by the system operator. This 
resource would receive 100 percent of its performance payment. A 
resource that does not deliver the exact amount requested through the 
dispatch signal, but which nonetheless is delivering frequency 
regulation service in the direction requested would only receive a 
fraction of its performance payment. Resources that move in the 
opposite direction of the dispatch signal will face a charge.
    150. Viridity recommends that accuracy be measured over what it 
describes as a reasonable number of intervals of the frequency 
regulation signal. It cites 4 intervals, or every 16 seconds in the 
case of a 4 second signal.\215\
---------------------------------------------------------------------------

    \215\ Viridity May 2, 2011 Comments at 4-5.
---------------------------------------------------------------------------

c. Commission Determination
    151. The Commission finds that measuring and accounting for 
accuracy in a resource's compensation is just and reasonable and will 
encourage resources to report accurately their achievable ramp rate and 
to follow the system operator's dispatch instructions. The Commission 
also finds it appropriate to base a resource's accuracy on how well it 
follows the dispatch signal and not on its contribution to correcting 
ACE. Indeed, we note that no commenters argue against accounting for 
frequency regulation service providers' accuracy.
    152. First, as the RTOs and ISOs and others note, the system 
operator does not always use the AGC signal to correct ACE to zero. 
There are situations where a resource can be given an AGC signal that 
is calibrated to anticipate changes in ACE. Second, as noted above, to 
base accuracy on ACE correction would be to open the door to resources 
second-guessing dispatch signals and under-reporting their actual 
ramping capability. Neither of these would be a desirable outcome. 
Indeed, a system operator faced with a fleet of resources with suddenly 
slower ramp rates would be forced to procure more frequency regulation 
capacity in order to be sure of reliable operations. Further, the 
system operator needs to have the confidence that when a dispatch 
signal is sent, resources will respond to it as directed. This is best 
accomplished by providing resources with an economic incentive to 
follow dispatch signals.
    153. Therefore, we will require all RTOs and ISOs to account for 
frequency regulation resources' accuracy in following the AGC dispatch 
signal when determining the performance payment compensation. However, 
we will not mandate a certain method for how accuracy is measured. For 
instance, we will not, contrary to Beacon's request, mandate that the 
system operator measure response on the same frequency as the AGC 
signal (i.e., every 4 or 6 seconds). In combination with the 
performance payment, accounting for accuracy by tracking how closely a 
resource follows its dispatch signal will meet the goal of having 
compensation reflect the work that frequency regulation resources 
perform for the system operator. We direct the RTOs and ISOs to 
determine the technical specifications of measuring accuracy. We will 
not pre-judge the methods of measuring accuracy presented by Primus 
Power and Viridity. Any stakeholder may use the standard RTO and ISO 
stakeholder processes to suggest how best to measure accuracy. The RTOs 
and ISOs are in the best position in the first instance to design a 
method for measuring accuracy which works with their system.
    154. However, we will require the RTOs and ISOs to use the same 
accuracy measurement method for all resources. That is, the RTO or ISO 
may not develop an accuracy metric that applies to one class of 
resources and another accuracy metric that applies to other resources. 
Doing so would move in the direction of creating a ``fast'' and 
``slow'' regulation service which we have declined to do. The RTOs and 
ISOs will have flexibility in how the designed method is used to 
determine accuracy (e.g., the method could be used to define an 
accuracy threshold or it could be used to define a resource-specific 
performance payment multiplier), but all resources have to be measured 
on the same basis. This flexibility will address comments that we 
should allow RTOs and ISOs to acknowledge the realistic performance 
characteristics of the resources providing frequency regulation 
service.
4. Net Energy
a. NOPR Proposal
    155. As explained in the NOPR, currently, regulating resources 
receive a payment (or charge) for the net energy injected (or 
withdrawn) as a result of providing regulation service in every RTO and 
ISO market. The Commission sought comment on the appropriateness of 
retaining net energy payments in light of the two-part payment proposed 
in the NOPR.\216\ Specifically, the Commission sought comment on 
whether the provisions in existing tariffs for net energy payments are 
redundant given the proposed requirement discussed herein that all RTOs 
and ISOs must pay regulating resources a mileage payment for the ACE 
correction service they provide, or whether this payment is a 
necessary, appropriate feature of day-ahead and real-time energy 
account balancing and settlement.
---------------------------------------------------------------------------

    \216\ NOPR, 134 FERC ] 61,124 at P 41.
---------------------------------------------------------------------------

b. Comments
    156. Many commenters support retaining net energy balancing. ESA 
and CESA state that hourly net-energy payments and Performance Payments 
are not redundant. ESA and CESA state that both types of payments are 
needed to ensure appropriate compensation of frequency regulation 
providers.\217\ ENBALA agrees that net energy payments in the existing 
tariffs should be maintained.\218\ Occidental also agreed, stating that 
net energy payments must be maintained in order to (1) recognize the 
true cost of frequency regulation service, (2) avoid subsidization of 
inefficient providers and (3) avoid inefficient market outcomes.\219\ 
Powerex suggests that the Commission should require RTOs and ISOs to 
continue to settle net energy in each five-minute interval.\220\ Xtreme 
Power reasons that frequency regulation resources should be paid--or 
pay for--

[[Page 67279]]

the energy they inject or withdraw. It argues that any net purchases of 
energy should be charged to storage-based frequency regulation 
providers at wholesale rates.\221\ NEPOOL explained that while mileage 
payments compensate for what is done in the regulation market; hourly 
net-energy payments are part of the compensation for what is done, and 
not done, in the energy market.\222\ Primus Power recommends retaining 
a separate payment for net energy, stating that this will ensure that 
capacity bids are not distorted by the volatility in the real-time 
energy market.\223\
---------------------------------------------------------------------------

    \217\ ESA May 2, 2011 Comments at 36, CESA May 2, 2011 Comments 
at 12.
    \218\ ENBALA May 2, 2011 Comments at 10.
    \219\ Occidental May 2, 2011 Comments at 4.
    \220\ Powerex May 2, 2011 Comments at 10.
    \221\ Xtreme Power May 2, 2011 Comments at 8.
    \222\ NEPOOL May 2, 2011 Comments at 12.
    \223\ Primus Power May 2, 2011 Comments at 7.
---------------------------------------------------------------------------

    157. SoCal Edison states that there are two fundamentally disparate 
ways to treat net energy balancing. One is to charge or credit a 
resource for its net real-time energy and the other is to exempt 
frequency regulation resources from such crediting and charging. 
Because, SoCal Edison states, the specific market design impacts the 
final outcome of using either method, it recommends that the Commission 
not mandate one particular method for treating net energy 
balances.\224\
---------------------------------------------------------------------------

    \224\ SoCal Edison May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

    158. On the other hand, Manitoba Hydro states that RTOs and ISOs 
should eliminate net energy balancing.\225\ PIOs recommend that the 
Commission not allow what they view as a redundant payment mechanism. 
Instead, PIOs recommend that the Commission only allow the retention of 
net energy balancing and remuneration if the RTOs and ISOs can show 
that this payment is distinct from the service that will be compensated 
under the NOPR's proposal, and that such payment is necessary and not 
redundant.\226\
---------------------------------------------------------------------------

    \225\ Manitoba Hydro May 2, 2011 Comments at 4.
    \226\ PIOs May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

    159. Beacon explains that tariffs that require energy storage 
facilities to purchase energy when providing ``regulation down'' 
without allowing for a corresponding energy settlement payment when the 
facility provides ``regulation up'' creates a financially infeasible 
situation within which these resources can operate. Tariffs that allow 
energy storage to settle their energy on a net basis will remove a 
significant barrier to the participation of energy storage projects 
connected at transmission.\227\
---------------------------------------------------------------------------

    \227\ Beacon May 2, 2011 Comments at 40-41.
---------------------------------------------------------------------------

    160. ISO-NE suggests that net energy payments not be mandated for 
storage resources in the Final Rule, as, for instance, expensive 
metering requirements designed for generators would preclude 
participation from a number of promising technologies that aggregate 
resources to provide regulation. ISO-NE asserts that small aggregated 
resources that take electric service at the retail level and are 
geographically dispersed should be afforded the opportunity to provide 
regulation without being required to participate in the wholesale 
energy market and meet the associated requirements that could be cost-
prohibitive for small resources.\228\ Other ISOs, however, have not 
incorporated net energy payments into their regulation markets. PJM 
argues that altering existing energy market provisions will likely 
result in other unintended consequences or will create a disincentive 
to provide frequency regulation service.\229\
---------------------------------------------------------------------------

    \228\ ISO-NE May 2, 2011 Comments at 14-15.
    \229\ PJM May 2, 2011 Comments at 9.
---------------------------------------------------------------------------

c. Commission Determination
    161. Upon consideration of the comments received, the Commission 
will take no action at this time on net energy balancing as it is 
currently used in the RTOs and ISOs; RTOs and ISOs may retain their 
current rules in this regard. Given the market rule changes being 
required above, the Commission currently does not find it necessary to 
require that RTOs and ISOs change their existing methods for netting 
injections and withdrawals of energy over the settlement period. In 
CAISO, for instance, there is no relation between the provision of 
frequency regulation service and netting of energy. In other markets, 
the treatment of net energy is different. SoCal Edison makes the valid 
point that the effect of the rules governing treatment of net energy 
balances depends on the specific market design into which they are 
integrated. As PIOs suggest, net energy balancing can be an integral 
part of the RTOs' and ISOs' accounting and system balancing and we will 
impose no requirements concerning this issue at this time.
    162. Beacon states that a storage resource that must pay the real-
time price when charging but is not likewise credited when discharging 
that power in response to a frequency regulation signal is put in an 
untenable financial position. We find that Beacon's concern is 
addressed by current RTO and ISO rules. Frequency regulation resources 
are charged at the real-time price for energy withdrawals and credited 
for energy injections.
5. Technical Issues
a. Comments
    163. Several commenters raise concerns over a variety of technical 
issues ranging from the definition of ramp rate, to software issues, to 
the substitutability of new technologies for old.
    164. On the issue of ramp rate, Alcoa states that existing market 
designs are ill suited for non-traditional resources, and RTOs and ISOs 
tend to develop models that force these resources to conform to the 
traditional design rather than create unique models. Alcoa refers to 
the current clearing mechanism, which multiplies a resource's ramp rate 
by five minutes. Alcoa argues that this design limits its ability to 
provide demand response, which is full range responsive in one minute, 
to nearly one fourth of its ramping capability. Alcoa claims that this 
leads to inefficient utilization of resources and increased costs.\230\ 
Similarly, SunEdison asserts that limiting performance to a MW per 
minute ramp response discriminates against resources that can respond 
in MW per second.\231\
---------------------------------------------------------------------------

    \230\ Alcoa May 2, 2011 Comments at 5-6.
    \231\ SunEdison May 2, 2011 Comments at 2-4.
---------------------------------------------------------------------------

    165. Concerning software, CAISO claims that implementation of the 
Final Rule would present considerable technical challenges. CAISO 
states that in addition to creating new charge codes, CAISO would have 
to develop a settlement system based on more granular telemetry than 
the current 10 minute settlement interval. According to CAISO, at least 
12 months would be required to design, test and implement the 
Commission's proposed performance payment mechanism. As such, CAISO 
requests the Commission provide a minimum of 18 months after the 
issuance of the Final Rule to implement necessary systems and 
processes.\232\
---------------------------------------------------------------------------

    \232\ CAISO May 2, 2011 Comments at 20-22.
---------------------------------------------------------------------------

    166. Similarly, ISO-NE claims that formulating a design that seeks 
to co-optimize energy, reserves, and regulation, particularly where 
correctly determining inter-temporal opportunity costs for storage 
resources might require an optimization horizon spanning hours or days, 
is a daunting technical challenge. It argues that formulating such a 
design might require a complete overhaul of existing real-time dispatch 
algorithms.\233\
---------------------------------------------------------------------------

    \233\ ISO-New England May 2, 2011 Comments at 9-13.
---------------------------------------------------------------------------

    167. On the other hand, CESA states that the Commission should 
ensure implementation of the Final Rule is not

[[Page 67280]]

delayed by computer software. CESA argues that there is no reason why 
the compensation method as set forth in the NOPR cannot be integrated 
into system operators' existing co-optimization algorithms.\234\ Beacon 
and ESA argue that while some flexibility may be required, delaying the 
implementation of the Final Rule would send inappropriate price signals 
to investors in energy storage technology that would be detrimental to 
the industry.\235\
---------------------------------------------------------------------------

    \234\ CESA May 2, 2011 Comments at 10.
    \235\ Beacon May 2, 2011 Comments at 36-37; ESA May 2, 2011 
Comments at 33-34.
---------------------------------------------------------------------------

    168. Raising concerns about technical substitutability of 
resources, EEI asserts that advantages in speed may be offset by a non-
traditional resource's lack of sustainability or automatic response. 
EEI argues that pricing policies must consider the needs of the entire 
system including the proper mix of resources to minimize system 
impacts. EEI theorizes that excessive use of fast acting resources may 
cause a balancing authority to require more traditional resources to 
offset the risk of being shorted.\236\
---------------------------------------------------------------------------

    \236\ EEI May 2, 2011 Comments at 8-9.
---------------------------------------------------------------------------

    169. Similarly, several commenters, including SoCal Edison, ISO-NE, 
CAREBS, and EPSA assert that over-emphasis on faster regulation 
resources without considering their ability to provide sustained energy 
(for as long as, for example, 15 minutes) may cause overcorrection, 
decreased reliability, and increased costs.\237\ CAREBS suggests that 
the Commission should consider how to compensate resources that are 
both fast-ramping and long-duration.\238\
---------------------------------------------------------------------------

    \237\ EPSA May 2, 2011 Comments at 6-7, SoCal Edison May 2, 2011 
Comments at 5-6, CAREBS May 2, 2011 Comments at 6-8.
    \238\ CAREBS May 2, 2011 Comments at 6-8.
---------------------------------------------------------------------------

    170. Likewise, CAISO argues that a fleet of resources that can 
respond accurately to dispatch signals for an appropriate duration is 
more valuable than resources that can respond quickly. CAISO therefore 
states that rules should compensate resources that respond accurately 
rather than simply quickly.\239\
---------------------------------------------------------------------------

    \239\ CAISO May 2, 2011 Comments at 16.
---------------------------------------------------------------------------

    171. ENBALA further expresses a concern that fast-responding 
resources could cause reliability issues in the power system by 
creating resonance conditions with inter-area oscillations if they 
respond to AGC signals with time constants less than 10 seconds. It 
explains that inter-area oscillations occur as a result of an imbalance 
of generation and system load. It argues that, within an 
interconnection, some generators will respond differently to load 
changes depending on their distance to the load center, which will 
cause some units to speed up or down more than others. As the 
generators change their speed by a small amount the power flow between 
the generators will change. Once this imbalance occurs, ENBALA 
contends, all generators will continually move with or against each 
other. When there is insufficient or negative damping, the oscillations 
will be sustained, or increase, which ENBALA states can cause damage to 
the power system.\240\
---------------------------------------------------------------------------

    \240\ ENBALA May 2, 2011 Comments at 6-7.
---------------------------------------------------------------------------

    172. ENBALA argues that fast responding resources should be 
integrated in the regulation fleet, but it states that the response 
times of resources need to be maintained above a safe level so as to 
eliminate this reliability risk. It recommends that NERC be allowed to 
assess the potential reliability risk that AGC control action within 
this time-frame represents before the Commission accepts the proposed 
incentive structure for frequency regulation in the wholesale 
electricity market.\241\
---------------------------------------------------------------------------

    \241\ Id. at 7.
---------------------------------------------------------------------------

    173. EnerNOC claims that the Commission's proposed telemetry 
requirements represent a burden to demand response participation by 
end-use customers. EnerNOC asserts that an aggregated load management 
data system can meet reporting requirements without forcing each 
individual end-use customer to conform to a system operator's normal 
telemetry requirements. Accordingly, EnerNOC encourages the Commission 
to allow for flexible RTO or ISO telemetry requirements for frequency 
regulation services.\242\
---------------------------------------------------------------------------

    \242\ EnerNOC May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    174. Xtreme Power states that pilot programs in several ISOs have 
identified ``drift'' in their frequency regulation signal, whereby the 
amount of regulation up does not equal the amount of regulation down. 
Xtreme Power asserts that ``drift'' interferes with the ability of 
energy-limited resources to provide regulation service, and suggests 
that a net zero energy balance regulation signal be implemented to 
address this concern. In addition, Xtreme Power questions whether RTOs 
and ISOs use frequency regulation service to provide other functions 
due to legacy control practices, thereby placing an undue burden on 
buyers and sellers of regulation. Xtreme Power therefore urges the 
Commission to require each RTO and ISO report on the nature of drift in 
their frequency regulation markets, the causes of such drift, and 
options to mitigate drift to allow for fair competition between 
generators and other resources.\243\
---------------------------------------------------------------------------

    \243\ Xtreme Power May 2, 2011 Comments at 8-10.
---------------------------------------------------------------------------

    175. ENBALA also raises the issue of what they term as an energy 
bias or lack of energy neutrality in the frequency regulation dispatch 
signal as a potential barrier to entry for energy storage devices and 
demand response.\244\ ENBALA describes a method by which the signal 
could be split into two different signals, one that is sent only to 
energy-limited resources and that is energy neutral, and another signal 
that still contains the energy bias for other resources.
---------------------------------------------------------------------------

    \244\ ENBALA May 2, 2011 Comments at 4-6.
---------------------------------------------------------------------------

    176. Jack Ellis recommends an examination of the costs, benefits, 
and technical feasibility of an approach that uses smaller market 
intervals and allows providers of flexibility to update their price/
quantity offers more frequently than is typically the case today.\245\ 
Mr. Ellis claims that this is simply an extension of intra-hour markets 
that most RTOs and ISOs currently operate, with two modifications. He 
contends that the first is that the time intervals will be shorter. 
Second, suppliers will be able to revise their price/quantity offers 
more frequently and closer to the start of the market interval; a 
resource would offer to sell or buy back a quantity of energy in an 
upcoming 30 second, one minute or five minute interval, rather than 
providing the grid operator with a ramp rate well ahead of time.\246\ 
Mr. Ellis states that this interval could be, in theory, as short as 
the AGC signaling interval, typically four or six seconds, though 
market intervals of 30 seconds or one minute may be more practical and 
equally effective.
---------------------------------------------------------------------------

    \245\ Jack Ellis April 12, 2011 Comments at 4.
    \246\ Id. at 4.
---------------------------------------------------------------------------

b. Commission Determination
    177. Regarding Alcoa's concerns that existing market designs are 
ill-suited for non-traditional resources, we find, for the reasons 
stated above, that a mileage-based performance payment component, as 
required in this Final Rule, will provide compensation that 
appropriately recognizes a resource's actual ramp rate capability.
    178. We reject SunEdison's request to redefine ramp rate. The 
expression of ramp rates in MW per minute does not limit the amount of 
capacity a resource with faster response times may offer into the 
frequency regulation market. Redefining ramp rate in MW per second 
would do no more than change the scale by which ramp rates are 
reported.

[[Page 67281]]

    179. In response to concerns that faster-responding resources will 
result in less sustainable or accurate resources being procured for 
regulation service, we disagree. This Final Rule only modifies the way 
in which resources are compensated for providing frequency regulation. 
It does not address requirements for qualification as a resource 
eligible to participate in wholesale regulation markets. Resources that 
wish to provide frequency regulation service must be capable of 
sustained response for an appropriate period as determined by the 
system operator. Furthermore, linking the performance payment to 
accuracy as required in the Final Rule will provide an appropriate 
incentive for resources of any speed to accurately follow the system 
operator's control signal.
    180. We agree with SoCal Edison's argument that each RTO or ISO 
should be allowed to determine whether the operator or the market 
participant is to be responsible for managing energy limitations. 
Nothing in this Final Rule affects how RTOs and ISOs manage energy 
limitations in their systems.
    181. We further emphasize that nothing in this Final Rule requires 
payments for enhanced performance; rather, it requires that resources 
providing frequency regulation be paid for the amount of service 
actually provided. As to potential impacts from over-reliance on 
faster-responding resources, we note again that currently the RTOs and 
ISOs meet their NERC-required reliability standards. If an RTO or ISO 
finds that the integration of too much of one type of resource impacts 
its ability to meet NERC reliability standards, we expect that it will 
take the necessary steps to ensure reliability.
    182. As to comments seeking compensation for resources that are 
both fast-responding and long-duration, we find that such resources 
will receive appropriate compensation under the Final Rule. In addition 
to receiving a performance payment that rewards the provision of 
frequency regulation service, these resources will be compensated for 
their long duration by being able to offer their full regulation 
capacity for a greater number of regulation intervals.
    183. In response to EnerNOC's statement regarding telemetry 
requirements, we note that this Final Rule directs no new telemetry 
requirements. We also reiterate that RTOs and ISOs are allowed 
flexibility in complying with the Final Rule to accommodate regional 
differences and the needs of their particular region and market, 
including telemetry requirements.
    184. We also reject as outside the scope of this proceeding Xtreme 
Power's requests to require reporting on ``drift'' or energy neutrality 
in the frequency regulation signal, as well as ENBALA's suggestion that 
RTOs and ISOs use different frequency regulation signals for different 
resources. These issues concern a technical issue of dispatch, not 
compensation. However, we note that some RTOs and ISOs have implemented 
changes to their markets that serve to mitigate the impact of drift on 
energy storage devices. For example, MISO and NYISO have developed 
market provisions that manage the charge state of energy storage 
devices,\247\ while ISO-NE allows energy storage devices to update 
their bids more frequently.\248\ We encourage entities to work together 
with stakeholders to analyze potential impediments to new technologies 
in all markets.
---------------------------------------------------------------------------

    \247\ See MISO, Energy and Operating Reserve Markets Business 
Practice Manual, Attachment D, Section 3.26; NYISO, Ancillary 
Services Manual, Section 4.3.2.
    \248\ See ISO-NE, Market Rule 1, Appendix J.
---------------------------------------------------------------------------

    185. CAISO, ISO-NE, and CESA all submit comments on the expected 
difficulty or ease with which the proposed NOPR changes can be 
integrated into existing market solution software. CAISO and ISO-NE 
request that sufficient time be allowed for implementation, with ISO-NE 
going so far as to speculate that including inter-temporal opportunity 
costs might be infeasible and that two-part bidding schemes can be very 
complex. As a general matter, the Commission believes that the 
deadlines discussed in the compliance section below will allow 
sufficient time for all RTOs and ISOs to comply. First, we note that we 
are not requiring RTOs and ISOs to be responsible for calculating 
inter-temporal opportunity costs; though we do require that resources 
be able to include such verifiable costs in their bids. We agree with 
ISO-NE that the decision of who should calculate inter-temporal 
opportunity costs is best left to the RTOs and ISOs. Requiring the RTO 
or ISO to calculate this cost might burden the system operator too 
much; in other RTOs and ISOs, the system operator might find it easier 
to complete this task. Thus, we leave it to the individual RTOs and 
ISOs, in the first instance, to find the solution that best fits their 
needs. Second, with regard to ISO-NE's concerns about two-part bidding, 
while we do require two-part bidding, we have not specified the 
specific technical aspects of how those bids are then used in the 
market-clearing algorithm. The Commission recognizes that two-part 
bidding solutions are not insignificant problems that might need to be 
addressed.\249\ However, we believe the time-frame set forth herein for 
submitting compliance filings will allow sufficient time to overcome 
such hurdles.
---------------------------------------------------------------------------

    \249\ See supra note 190.
---------------------------------------------------------------------------

6. Definition of Frequency Regulation
a. Comments
    186. Duke seeks clarification of the definition of ``frequency 
regulation,'' which Duke asserts is defined differently in the NOPR 
than in the NERC Glossary of Terms. It points out that NERC's 
definition includes both ``primary frequency control'' (i.e., turbine 
governor response) and ``secondary frequency control'' (i.e., AGC). In 
Duke's view, the NOPR was not clear as to whether both primary and 
secondary frequency controls are included, although Duke contends that 
the body of the NOPR suggests that only secondary frequency control is 
included. Duke asks the Commission to clarify this point or, in the 
alternative, to direct NERC and its stakeholders to examine the issue 
and propose a resolution.\250\
---------------------------------------------------------------------------

    \250\ Duke May 2, 2011 Comments at 3-4.
---------------------------------------------------------------------------

    187. ISO-NE expresses concern that the NOPR defined frequency 
regulation too narrowly by focusing exclusively on responding to ACE to 
the exclusion of broader reliability criteria. It proposes a modified 
definition of frequency response that considers that the objective of 
the regulation market is to provide a means for the balancing authority 
to competitively procure sufficient frequency regulation resources to 
ensure compliance with the NERC CPS1 and CPS2 standards.\251\
---------------------------------------------------------------------------

    \251\ ISO-New England May 2, 2011 Comments at 5-6.
---------------------------------------------------------------------------

    188. MISO argues that the Commission's proposed definition of 
frequency regulation is inconsistent with the Commission-approved NERC 
definition. MISO contends that the proposed definition characterizes 
frequency regulation as a response to transmission system ACE, while 
frequency response is separated and defined as an autonomous response 
by generators to system frequency. MISO claims that NERC's definition, 
in contrast, refers to a system's ability to maintain scheduled 
frequency, and includes both AGC and governor response. MISO argues 
that there is not a direct correlation between scheduled frequency and 
ACE. Furthermore, MISO asserts that NERC's definition appears to 
encompass both frequency regulation and frequency response as defined 
by

[[Page 67282]]

the Commission. Accordingly, MISO requests that the Commission 
reconsider the proposed definition of frequency regulation to avoid 
potential confusion as a result of conflicting terms, or limiting the 
flexibility of the system operator to call on regulating resources to 
maintain system balance and reliability.\252\
---------------------------------------------------------------------------

    \252\ MISO May 2, 2011 Comments at 3-5.
---------------------------------------------------------------------------

    189. In addition, Invenergy requests that the Commission create 
standard definitions and terminology for regulation, with the intention 
of avoiding confusion, inconsistency, and/or the creation of redundant 
or extraneous regulation products.\253\
---------------------------------------------------------------------------

    \253\ Invenergy May 2, 2011 Comments at 3.
---------------------------------------------------------------------------

    190. IRC is also concerned that the proposed definition of 
frequency regulation in the NOPR is focused solely on ACE, which IRC 
argues is only one component of regulation service. Instead of rapid 
response, IRC advocates for ``smart response,'' which it describes as 
aligning the response characteristics of all available resources with 
system needs to provide the most efficient means of managing frequency 
regulation in each balancing authority Area. IRC notes that a resource 
with rapid response capability can provide significant response to the 
ACE (i.e., following the ACE both up and down). But IRC argues that a 
significant part of that response may be unnecessary if the response 
was strictly utilized for a zero-averaging ACE. Alternatively, IRC 
explains that the response could provide significant value if it is 
directed against a non-zero averaging ACE, because in that case it 
would be utilized against the overall system needs rather than to 
merely ``chase'' ACE, which, as only one part of the operational 
equation, does not produce the most effective operational 
response.\254\
---------------------------------------------------------------------------

    \254\ IRC May 2, 2011 Comments at 4-5.
---------------------------------------------------------------------------

b. Commission Determination
    191. The Commission disagrees with Duke's contention that the NOPR 
is not clear as to whether its definition of frequency regulation 
includes both primary and secondary frequency controls. The NOPR 
stated, ``Frequency regulation service is the injection or withdrawal 
of real power by facilities capable of responding appropriately to a 
transmission system's frequency deviations or interchange power 
imbalance, both measured by the ACE * * *. Frequency regulation is 
distinguishable from Frequency response.'' \255\
---------------------------------------------------------------------------

    \255\ NOPR, 134 FERC ] 61,124 at P 4-5.
---------------------------------------------------------------------------

    192. In response to ISO-NE., MISO, and the IRC's concerns that the 
Commission's proposed definition of frequency regulation in the NOPR is 
too narrow and is inconsistent with the Commission-approved NERC 
definition, we address this issue in section 3 infra by requiring that 
accuracy be measured in relation to the system operator's dispatch 
signal and by revisions to the proposed regulatory text. As described 
below, we have revised the regulatory text to define frequency 
regulation as ``the capability to inject or withdraw real power by 
resources capable of responding appropriately to a system operator's 
automatic generation control signal in order to correct for actual or 
expected Area Control Error needs.'' We also address Invenergy's 
request for a standard definition. The alteration to the proposed 
regulatory text, we believe, provides a sufficiently detailed 
definition of frequency regulation to avoid confusion. The definition 
avoids the implication that a system operator's dispatch signal for 
frequency regulation resources always aims to drive ACE to zero at any 
given moment in time, but also describes only secondary frequency 
control and does not include primary frequency control, i.e., frequency 
response. Further, the Commission finds that the distinction between 
the pro forma OATT and this new language will not cause confusion 
because it applies only to the organized wholesale markets: the RTOs 
and ISOs.
7. Miscellaneous Issues
a. Comments
    193. Several commenters discussed various issues pertaining to 
barriers to participation \256\ and separating regulation up and 
regulation down,\257\ and, a few commenters argue that the Commission 
should adopt various requirements related to NERC,\258\ or storage 
facilities.\259\
---------------------------------------------------------------------------

    \256\ For example, Powerex argues that restricting units 
eligible to provide regulation service to units within the RTO or 
ISO market footprint undermines market liquidity and discourages the 
development of competitive regulation markets. Accordingly, Powerex 
requests that the Commission clarify that RTOs and ISOs cannot 
unduly restrict participation by external resources and must justify 
restrictions solely on reliability or deliverability concerns. 
Powerex May 2, 2011 Comments at 5-6. Occidental requests that the 
Commission revise the definition of demand response to state that an 
increase in load in response to dispatch is also considered demand 
response. Occidental May 2, 2011 Comments at 3-4.
    \257\ Alcoa, AWEA, Occidental and Steel Producers argue that the 
Commission should urge or require separate regulation up and 
regulation down markets in order to recognize the separate value of 
each service and to promote more efficient regulation response. 
Alcoa May 2, 2011 Comments at 7-8; AWEA May 2, 2011 Comments at 4-5; 
Occidental May 2, 2011 Comments at 1; Steel Producers May 2, 2011 
Comments at 2.
    \258\ EEI and Detroit Edison seek a requirement that RTOs and 
ISOs develop pilot programs in consultation with NERC to evaluate 
the impact of non-traditional resources; Alcoa argues that NERC 
performance standards are designed based on traditional technologies 
and request that the Commission direct NERC to study the reduction 
in system requirements through integration of nontraditional 
resources outside the scope of this rulemaking; Duke states that it 
is unaware of any technical study or NERC standard or requirement 
that would indicate that a faster response to AGC is necessary for 
reliable system operations and that RTOs and ISOs are ultimately 
responsible for determining what resources are necessary to comply 
with the NERC reliability standards.
    \259\ Starwood/Premium recommends that the Commission consider 
adapting the NOPR proposal to include storage devices that are able 
to provide multiple services as discussed in the Commission's June 
11, 2010 Notice of Request for Comments. See Request for Comments 
Regarding Rates, Accounting and Financial Reporting for New Electric 
Storage Technologies, Docket No. AD10-13-000 (2010) (Storage RFC).
---------------------------------------------------------------------------

b. Commission Determination
    194. These issues are beyond the scope of this proceeding, which is 
limited to remedying the existing undue discrimination in the 
compensation of frequency regulation service in the organized wholesale 
electricity markets. This Final Rule is also not focused on any 
particular resource type, but rather is resource-neutral. The 
directives of this Final Rule will ensure that all eligible resources 
providing frequency regulation service within existing RTO or ISO 
frequency regulation markets are compensated at the just and reasonable 
rate.
    195. We further emphasize that the directives of this Final Rule 
apply only to secondary frequency regulation in the organized wholesale 
electricity markets and not to primary frequency response. As noted in 
the NOPR, the Commission has separately released for public comment a 
staff study evaluating the use of frequency response metrics as a tool 
to assess the reliability impacts of varying resource mixes on the 
transmission grid.\260\ However we disagree with commenters who argue 
that requiring the reforms directed herein to ensure just and 
reasonable rates will provide excessive compensation in the secondary 
frequency regulation markets. We decline to impose generic requirements 
in this Final Rule relating to compensation reforms for other critical 
ancillary services.
---------------------------------------------------------------------------

    \260\ NOPR, 134 FERC ] 61,124 at n.610.
---------------------------------------------------------------------------

    196. With respect to Starwood/Premium's request that the Commission 
address in this proceeding the storage-related issues raised in the 
Storage RFC the Commission notes that, on June 16, 2011, the Commission 
issued a Notice of

[[Page 67283]]

Inquiry that continues our examination of storage-related issues.\261\ 
Because these issues are being addressed in another proceeding, we 
decline to address them here.
---------------------------------------------------------------------------

    \261\ Third-Party Provision of Ancillary Services; Accounting 
and Financial Reporting for New Electric Storage Technology, 135 
FERC ] 61,240 (2011).
---------------------------------------------------------------------------

III. Compliance Requirements and Summary of Commission Determinations 
and Findings

    197. In this Final Rule the Commission finds that current methods 
for compensating resources for the provision of frequency regulation 
are unduly discriminatory. To remedy this undue discrimination, the 
Commission finds that it is just and reasonable to require all RTOs and 
ISOs to modify their tariffs to provide for a two-part payment to 
frequency regulation resources.
    198. The first part of this payment will be a capacity, or option, 
payment for keeping a resource's capacity in reserve in the event that 
it is needed to provide real-time frequency regulation service. This 
payment must be a uniform payment to all cleared resources, and must be 
a payment that includes the marginal unit's opportunity costs. The RTO 
or ISO must calculate and include in its market-clearing process the 
cross-product opportunity costs of each resource offering its capacity. 
We will leave to the RTOs and ISOs the discretion of proposing to whom 
the responsibility falls of calculating any applicable inter-temporal 
opportunity costs. This capacity payment also must be based on 
competitive market-based bids for the provision of frequency regulation 
capacity submitted by resources.
    199. The second part of the payment shall be a performance payment 
that reflects the amount of work each resource performs in real-time. 
This payment must reflect the accuracy with which each resource 
responds to the system operator's dispatch signal. The performance 
payment must be market-based (i.e., based on resource bids that reflect 
the cost of providing the service). We leave to the RTOs and ISOs to 
propose such details as bidding parameters and other details that may 
need to vary by market and region.
    200. Regarding accuracy, the Commission finds that it is 
appropriate to tie the measurement of a resource's accuracy to the 
system operator's AGC dispatch signal and not to ACE correction. 
Therefore, each RTO and ISO must propose a method for measuring a 
frequency regulation resource's accuracy with respect to the dispatch 
signal it is sent and reflecting that accuracy in the resource's 
payment. We do require that the same accuracy metric must be used for 
all resources providing frequency regulation service in an RTO or ISO.
    201. The Commission recognizes that making these changes could 
require significant work on the part of the RTOs and ISOs. Therefore, 
the tariff changes needed to implement the compensation approach 
required in this Final Rule, including a uniform price for regulation 
capacity, and a performance payment for the provision of frequency 
regulation service, with such payment reflecting a resource's accuracy 
in following the AGC dispatch signal, must be filed within 120 days of 
the effective date of this Final Rule. We will allow further 180 days 
from that date for implementation.

IV. Information Collection Statement

    202. The Office of Management and Budget's (OMB) regulations 
require approval of certain information collection requirements imposed 
by agency rules. Upon approval of a collection(s) of information, OMB 
will assign an OMB control number and an expiration date. Respondents 
subject to the filing requirements of a rule will not be penalized for 
failing to respond to these collections of information unless the 
collections of information display a valid OMB control number.
    203. This Final Rule amends the Commission's regulations under Part 
35 to require RTOs and ISOs to pay both a uniform clearing price for 
frequency regulation capacity to all cleared frequency regulation 
resources and a performance payment for the provision of frequency 
regulation service, with the latter payment reflecting a resource's 
accuracy of performance. To accomplish this, the Commission requires 
RTOs and ISOs to adopt tariff revisions reflecting these changes. In 
addition to making tariff changes, the Commission also expects that 
RTOs and ISOs will be required to modify existing software systems. The 
information provided for under Part 35 is identified as FERC-516.
    204. Under section 3507(d) of the Paperwork Reduction Act of 
1995,\262\ the reporting requirements in this rulemaking will be 
submitted to OMB for review. In their notice of March 15, 2011, OMB 
took no action on the NOPR, instead deferring their approval until 
review of the Final Rule.
---------------------------------------------------------------------------

    \262\ 44 U.S.C. 3507(d).
    \263\ SPP is not included in the respondents because they 
currently do not have a frequency regulation compensation mechanism 
in their tariff and independent of this proceeding they have 
indicated that they are already planning to implement such a 
mechanism. Therefore, it is expected that any additional burden on 
SPP due to this proceeding will be de minimus.
    \264\ This category was not included in the NOPR estimates. 
Since issuing the NOPR the Commission has determined that each RTO's 
and ISO's market software will need to be modified in order to 
comply with this final rule.
---------------------------------------------------------------------------

    205. The Commission solicited comments on the need for this 
information, whether the information will have practical utility, the 
accuracy of provided burden estimates, ways to enhance the quality, 
utility, and clarity of the information to be collected, and any 
suggested methods for minimizing the respondent's burden, including the 
use of automated information techniques. The Commission did not receive 
any specific comments regarding its burden estimates. The Public 
reporting burden for the requirements contained in the Final Rule is as 
follows:

----------------------------------------------------------------------------------------------------------------
                                           Number of
            Data collection               respondents      Number of       Hours per    Total hours  in year one
                                             \263\         responses       response
FERC 516                                           [1]             [2]             [3]  [1 x 2 x 3]
----------------------------------------------------------------------------------------------------------------
Conforming tariff changes made by RTOs/              5               1             100  500.
 ISOs (18 CFR 35.28(g)(3)). One time
 burden.
Software changes made by RTOs/ISOs.                  5               1            1000  5000.
 One time burden\264\.
    Totals............................  ..............  ..............  ..............  5500 one time burden.
----------------------------------------------------------------------------------------------------------------


[[Page 67284]]

    The additional one-time burden of 5,500 hours is being spread over 
the next three years for the purposes of submittal to the OMB, giving 
an average additional annual burden of 1833 hours (rounded) or 367 
hours (rounded) per year per respondent.
    Cost to Comply: The Commission has projected the cost of compliance 
to be $687,500.
    Total Annual Hours for Collection in initial year (5500 hours) @ 
$125 an hour [average cost of attorney ($200 per hour), consultant 
($150), technical ($125),\265\ and administrative support ($25)] = 
$687,500.
---------------------------------------------------------------------------

    \265\ The Commission has increased this estimate from $80/hour 
to $125/hour to account for the software changes that will be needed 
to be done by high level staff.
---------------------------------------------------------------------------

    Title: FERC-516, Electric Rate Schedules and Tariff Filings.
    Action: Proposed Collection.
    OMB Control No. 1902-0096.
    Respondents for this Rulemaking: Businesses or other for profit 
and/or not-for-profit institutions.
    Frequency of Information: As indicated in the table.
    Necessity of Information: The Federal Energy Regulatory Commission 
is requiring ISOs and RTOs to change their tariffs to provide for 
compensation for frequency regulation service in a manner that remedies 
undue discrimination in the procurement of such service in the 
organized wholesale electricity markets, and ensure just and reasonable 
rates.
    Internal Review: The Commission has reviewed the proposed changes 
and has determined that the changes are necessary. These requirements 
conform to the Commission's need for efficient information collection, 
communication, and management within the energy industry. The 
Commission has assured itself, by means of internal review, that there 
is specific, objective support for the burden estimates associated with 
the information collection requirements.
    206. Interested persons may obtain information on this information 
collection by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, Attention: 
Ellen Brown, Office of the Executive Director, email: 
[email protected], phone: (202) 502-8663, or fax: (202) 273-0873.
    207. Comments concerning this information collection can be sent to 
the Office of Management and Budget, Office of Information and 
Regulatory Affairs, Washington, DC 20503 [Attention: Desk Officer for 
the Federal Energy Regulatory Commission, phone: (202) 395-4718, fax: 
(202) 395-7285].

V. Environmental Analysis

    208. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\266\ The 
Commission concludes that neither an Environmental Assessment nor an 
Environmental Impact Statement is required for this Final Rule under 
section 380.4(a)(15) of the Commission's regulations, which provides a 
categorical exemption for actions under sections 205 and 206 of the FPA 
relating to the filing of schedules containing all rates and charges 
for the transmission or sale subject to the Commission's jurisdiction, 
plus the classification, practices, contracts, and regulations that 
affect rates, charges, classifications, and services.\222\
---------------------------------------------------------------------------

    \266\ Regulations Implementing the National Environmental Policy 
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    209. The Regulatory Flexibility Act of 1980 (RFA) \267\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small entities. 
The RFA mandates consideration of regulatory alternatives that 
accomplish the stated objectives of a proposed rule and that minimize 
any significant economic impact on a substantial number of small 
entities. The Small Business Administration's (SBA) Office of Size 
Standards develops the numerical definition of a small business.\268\ 
The SBA has established a size standard for electric utilities, stating 
that a firm is small if, including its affiliates, it is primarily 
engaged in the transmission, generation and/or distribution of electric 
energy for sale and its total electric output for the preceding twelve 
months did not exceed four million megawatt hours.\269\ Only five ISOs 
and RTOs, not small entities, are impacted directly by this rule.
---------------------------------------------------------------------------

    \267\ 5 U.S.C. 601-12.
    \268\ 13 CFR 121.101.
    \269\ 13 CFR 121.201, Sector 22, Utilities & n.1.
---------------------------------------------------------------------------

    210. CAISO is a non-profit organization with over 54,000 megawatts 
of capacity and over 25,000 circuit miles of power lines. CAISO's 
annual total energy deliveries in 2009 were 230,754,000 MWh.
    211. NYISO is a non-profit organization that oversees wholesale 
electricity markets, dispatches over 500 generators, and manages a 
nearly 11,000-mile network of high-voltage lines. NYISO's 2009 energy 
deliveries, including transmission and distribution losses and 
excluding station power was 680,767,000 MWh.
    212. PJM comprises more than 600 members including power 
generators, transmission owners, electricity distributors, power 
marketers, and large industrial customers, serving 13 states and the 
District of Columbia. PJM's net energy for load in 2009 was 680,767,000 
MWh.
    213. MISO is a non-profit organization with over 145,000 megawatts 
of installed generation. MISO has over 57,000 miles of transmission 
lines and serves 13 states and one Canadian province. MISO's annual 
transmission billings for 2010 were 629,000,000 MWh.
    214. ISO-NE is a regional transmission organization serving six 
states in New England. The system comprises more than 8,000 miles of 
high-voltage transmission lines and over 350 generators. In 2009, ISO-
NE's net energy for load was 126,839,000 MWh.
    215. Based on the above, the Commission certifies this rule will 
not have a significant economic impact on a substantial number of small 
entities, and therefore no regulatory flexibility analysis is required.

VII. Document Availability

    216. In addition to publishing the full text of this document in 
the Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through the Commission's Home Page (http://www.ferc.gov) and 
in the Commission's Public Reference Room during normal business hours 
(8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, 
Washington, DC 20426.
    217. From the Commission's Home Page on the Internet, this 
information is available on eLibrary. The full text of this document is 
available on eLibrary in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    218. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-(866) 208-3676) or email at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
[email protected].

[[Page 67285]]

VIII. Effective Date and Congressional Notification

    219. This Final Rule will become effective on December 30, 2011. 
The Commission has determined, with the concurrence of the 
Administrator of the Office of Information and Regulatory Affairs, 
Office of Management and Budget, that this rule is not a ``major rule'' 
as defined in section 351 of the Small Business Regulatory Enforcement 
Fairness Act of 1996.

    By the Commission. Commissioner Spitzer is not participating.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
    In consideration of the foregoing, the Commission amends Part 35, 
Chapter I, Title 18 of the Code of Federal Regulations as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

0
1. The authority citation for Part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.


0
2. Amend Sec.  35.2 by adding a new paragraph (g) to read as follows:


Sec.  35.2  Definitions.

* * * * *
    (g) Frequency regulation. The term frequency regulation as used in 
this part will mean the capability to inject or withdraw real power by 
resources capable of responding appropriately to a system operator's 
automatic generation control signal in order to correct for actual or 
expected Area Control Error needs.

0
3. Amend Sec.  35.28 by adding a new paragraph (g)(7) to read as 
follows:


Sec.  35.28  Non-discriminatory open access transmission tariff.

* * * * *
    (g) * * *
    (7) Frequency regulation compensation in ancillary services 
markets. Each Commission-approved independent system operator or 
regional transmission organization that has a tariff that provides for 
the compensation for frequency regulation service must provide such 
compensation based on the actual service provided, including a capacity 
payment that includes the marginal unit's opportunity costs and a 
payment for performance that reflects the quantity of frequency 
regulation service provided by a resource when the resource is 
accurately following the dispatch signal.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix

List of Commenters

A123 Systems, Inc. (A123)
Alcoa Inc. (Alcoa)
Alliance for Industrial Efficiency, Inc. (The Alliance)
American Wind Energy Association (AWEA)
Beacon Power Corporation (Beacon)
California Independent System Operator Corporation (CAISO)
California Energy Storage Alliance (CESA)
Coalition to Advance Renewable Energy Through Bulk Energy Storage 
(CAREBS)
California Public Utilities Commission (CPUC)
Dayton Power and Light Company (Dayton)
Detroit Edison Company (Detroit Edison)
Dominion Resources Services, Inc. (Dominion)
Duke Energy Corporation (Duke)
Environmental Defense Fund (EDF)
Edison Electric Institute (EEI)
Electricity Consumers Resource Council (ELCON)
Electric Storage Association (ESA)
Jack Ellis
ENBALA Power Networks (ENBALA)
EnerNOC, Inc. (EnerNOC)
Electric Power Supply Association (EPSA)
FirstEnergy Service Company (FirstEnergy)
Invenergy Wind Development LLC (Invenergy)
ISO/RTO Council (IRC)
ISO New England Inc. (ISO-NE)
Manitoba Hydro
Midwest Independent System Operator, Inc. (MISO)
Midwest Independent System Operator Transmission Owners (MISO TOs)
Morgan Stanley Capital Group Inc. (Morgan Stanley)
NaturEner USA, LLC (NaturEner)
Natural Gas Supply Association (NGSA)
New England Conference of Public Utilities Commissioners (NECPUC)
New England Power Pool (NEPOOL)
New York Independent System Operator, Inc. (NYISO)
New York Public Service Commission (NYPSC)
New York Transmission Owners (NY TOs)
Occidental Chemical Corporation (Occidental)
Organization of Midwest ISO States (OMS)
Pennsylvania Public Utility Commission (PaPUC)
Pacific Gas and Electric Company (PG&E)
PJM Interconnection, L.L.C. (PJM)
Powerex Corporation (Powerex)
Primus Power (Primus)
Project for a Sustainable FERC Energy Policy on Behalf of Public 
Interest Organizations (PIO)
Recycled Energy Development (RED)
Southern California Edison Company (SoCal Edison)
Starwood Energy Global Group, L.L.C and Premium Power Corporation 
(Starwood/Premium)
Steel Producers
SunEdison LLC (SunEdison)
Transmission Access Policy Study Group (TAPS)
VCharge
Viridity Energy, Inc. (Viridity)
Xtreme Power, Inc. (Xtreme Power)

[FR Doc. 2011-27622 Filed 10-28-11; 8:45 am]
BILLING CODE 6717-01-P